UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-31293
EQUINIX, INC.
(Exact name of registrant as specified in its charter)
Delaware | 77-0487526 | |
(State of incorporation) | (I.R.S. Employer Identification No.) |
One Lagoon Drive, Fourth Floor, Redwood City, California 94065
(Address of principal executive offices, including ZIP code)
(650) 598-6000
(Registrants 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 registrants Common Stock as of June 30, 2013 was 49,418,143.
EQUINIX, INC.
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
(in thousands)
June 30, 2013 |
December 31, 2012 |
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(unaudited) | ||||||||
Assets | ||||||||
Current assets: |
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Cash and cash equivalents |
$ | 517,496 | $ | 252,213 | ||||
Short-term investments |
323,460 | 166,492 | ||||||
Accounts receivable, net |
201,336 | 163,840 | ||||||
Other current assets |
55,317 | 57,206 | ||||||
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Total current assets |
1,097,609 | 639,751 | ||||||
Long-term investments |
375,971 | 127,819 | ||||||
Property, plant and equipment, net |
4,103,344 | 3,918,999 | ||||||
Goodwill |
1,012,102 | 1,042,564 | ||||||
Intangible assets, net |
184,740 | 201,562 | ||||||
Other assets |
304,083 | 202,269 | ||||||
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Total assets |
$ | 7,077,849 | $ | 6,132,964 | ||||
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Liabilities and Stockholders Equity | ||||||||
Current liabilities: |
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Accounts payable and accrued expenses |
$ | 258,027 | $ | 268,853 | ||||
Accrued property, plant and equipment |
101,015 | 63,509 | ||||||
Current portion of capital lease and other financing obligations |
85,262 | 15,206 | ||||||
Current portion of loans payable |
40,360 | 52,160 | ||||||
Other current liabilities |
122,871 | 139,561 | ||||||
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Total current liabilities |
607,535 | 539,289 | ||||||
Capital lease and other financing obligations, less current portion |
684,873 | 545,853 | ||||||
Loans payable, less current portion |
164,919 | 188,802 | ||||||
Convertible debt |
716,265 | 708,726 | ||||||
Senior notes |
2,250,000 | 1,500,000 | ||||||
Other liabilities |
245,768 | 230,843 | ||||||
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Total liabilities |
4,669,360 | 3,713,513 | ||||||
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Redeemable non-controlling interests (Note 10) |
96,614 | 84,178 | ||||||
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Commitments and contingencies (Note 11) |
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Stockholders equity: |
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Common stock |
50 | 49 | ||||||
Additional paid-in capital |
2,651,396 | 2,583,371 | ||||||
Treasury stock |
(36,284 | ) | (36,676 | ) | ||||
Accumulated other comprehensive loss |
(200,082 | ) | (101,042 | ) | ||||
Accumulated deficit |
(103,205 | ) | (110,429 | ) | ||||
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Total stockholders equity |
2,311,875 | 2,335,273 | ||||||
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Total liabilities, redeemable non-controlling interests and stockholders equity |
$ | 7,077,849 | $ | 6,132,964 | ||||
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See accompanying notes to condensed consolidated financial statements
3
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
Three months
ended June 30, |
Six months
ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
Revenues |
$ | 525,669 | $ | 457,249 | $ | 1,045,124 | $ | 900,494 | ||||||||
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Costs and operating expenses: |
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Cost of revenues |
267,693 | 225,289 | 526,961 | 442,387 | ||||||||||||
Sales and marketing |
59,478 | 47,603 | 117,754 | 94,013 | ||||||||||||
General and administrative |
88,632 | 80,595 | 178,317 | 158,911 | ||||||||||||
Restructuring charge |
(4,837 | ) | | (4,837 | ) | | ||||||||||
Acquisition costs |
2,526 | 1,666 | 6,188 | 2,341 | ||||||||||||
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Total costs and operating expenses |
413,492 | 355,153 | 824,383 | 697,652 | ||||||||||||
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Income from continuing operations |
112,177 | 102,096 | 220,741 | 202,842 | ||||||||||||
Interest income |
917 | 963 | 1,664 | 1,654 | ||||||||||||
Interest expense |
(61,001 | ) | (46,787 | ) | (121,332 | ) | (99,605 | ) | ||||||||
Other income (expense) |
2,768 | (1,844 | ) | 2,309 | (1,998 | ) | ||||||||||
Loss on debt extinguishment |
(93,602 | ) | | (93,602 | ) | | ||||||||||
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Income (loss) from continuing operations before income taxes |
(38,741 | ) | 54,428 | 9,780 | 102,893 | |||||||||||
Income tax benefit (expense) |
10,612 | (17,138 | ) | (1,586 | ) | (30,991 | ) | |||||||||
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Net income (loss) from continuing operations |
(28,129 | ) | 37,290 | 8,194 | 71,902 | |||||||||||
Net income from discontinued operations, net of tax |
| 350 | | 549 | ||||||||||||
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Net income (loss) |
(28,129 | ) | 37,640 | 8,194 | 72,451 | |||||||||||
Net income attributable to redeemable non-controlling interests |
(529 | ) | (1,193 | ) | (970 | ) | (1,481 | ) | ||||||||
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Net income (loss) attributable to Equinix |
$ | (28,658 | ) | $ | 36,447 | $ | 7,224 | $ | 70,970 | |||||||
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Earnings (loss) per share (EPS) attributable to Equinix: |
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Basic EPS from continuing operations |
$ | (0.58 | ) | $ | 0.75 | $ | 0.15 | $ | 1.48 | |||||||
Basic EPS from discontinued operations |
| 0.01 | | 0.01 | ||||||||||||
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Basic EPS |
$ | (0.58 | ) | $ | 0.76 | $ | 0.15 | $ | 1.49 | |||||||
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Weighted-average shares |
49,379 | 48,016 | 49,205 | 47,485 | ||||||||||||
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Diluted EPS from continuing operations |
$ | (0.58 | ) | $ | 0.72 | $ | 0.14 | $ | 1.43 | |||||||
Diluted EPS from discontinued operations |
| 0.01 | | 0.01 | ||||||||||||
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Diluted EPS |
$ | (0.58 | ) | $ | 0.73 | $ | 0.14 | $ | 1.44 | |||||||
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Weighted-average shares |
49,379 | 52,351 | 49,976 | 51,633 | ||||||||||||
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See accompanying notes to condensed consolidated financial statements
4
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
Three months
ended June 30, |
Six months
ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
(unaudited) | ||||||||||||||||
Net income (loss) |
$ | (28,129 | ) | $ | 37,640 | $ | 8,194 | $ | 72,451 | |||||||
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Other comprehensive loss, net of tax: |
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Foreign currency translation loss |
(30,666 | ) | (49,207 | ) | (103,220 | ) | (14,895 | ) | ||||||||
Unrealized loss on available for sale securities |
(458 | ) | (177 | ) | (360 | ) | (99 | ) | ||||||||
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(31,124 | ) | (49,384 | ) | (103,580 | ) | (14,994 | ) | |||||||||
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Comprehensive income (loss), net of tax |
(59,253 | ) | (11,744 | ) | (95,386 | ) | 57,457 | |||||||||
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Net income attributable to redeemable non-controlling interests |
(529 | ) | (1,193 | ) | (970 | ) | (1,481 | ) | ||||||||
Other comprehensive loss attributable to redeemable non-controlling interests |
5,309 | 3,974 | 4,540 | 2,915 | ||||||||||||
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Comprehensive income (loss) attributable to Equinix |
$ | (54,473 | ) | $ | (8,963 | ) | $ | (91,816 | ) | $ | 58,891 | |||||
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See accompanying notes to condensed consolidated financial statements
5
Condensed Consolidated Statements of Cash Flows
(in thousands)
Six months
ended June 30, |
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2013 | 2012 | |||||||
(unaudited) | ||||||||
Cash flows from operating activities: |
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Net income |
$ | 8,194 | $ | 72,451 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation |
202,493 | 178,615 | ||||||
Stock-based compensation |
46,897 | 39,652 | ||||||
Excess tax benefits from stock-based compensation |
(22,421 | ) | | |||||
Restructuring charge |
(4,837 | ) | | |||||
Amortization of debt issuance costs and debt discounts |
11,637 | 13,009 | ||||||
Amortization of intangible assets |
13,623 | 9,751 | ||||||
Provision for allowance for doubtful accounts |
1,598 | 2,446 | ||||||
Loss on debt extinguishment |
93,602 | | ||||||
Accretion of asset retirement obligation and accrued restructuring charges |
2,402 | 2,370 | ||||||
Other items |
5,566 | 1,525 | ||||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(43,761 | ) | (34,541 | ) | ||||
Income taxes, net |
(75,762 | ) | 23,222 | |||||
Other assets |
(18,036 | ) | 16,846 | |||||
Accounts payable and accrued expenses |
396 | (9,887 | ) | |||||
Other liabilities |
9,749 | 5,316 | ||||||
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Net cash provided by operating activities |
231,340 | 320,775 | ||||||
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Cash flows from investing activities: |
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Purchases of investments |
(623,804 | ) | (165,818 | ) | ||||
Sales of investments |
140,450 | 274,211 | ||||||
Maturities of investments |
74,796 | 517,594 | ||||||
Purchase of New York IBX data center |
(2,960 | ) | | |||||
Purchases of property, plant and equipment |
(198,530 | ) | (341,974 | ) | ||||
Increase in restricted cash |
(836,763 | ) | (51 | ) | ||||
Release of restricted cash |
841,925 | 79,351 | ||||||
Other investing activities, net |
(107 | ) | | |||||
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Net cash provided by (used in) investing activities |
(604,993 | ) | 363,313 | |||||
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Cash flows from financing activities: |
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Purchases of treasury stock |
| (13,364 | ) | |||||
Proceeds from employee equity awards |
15,880 | 36,473 | ||||||
Excess tax benefits from stock-based compensation |
22,421 | | ||||||
Proceeds from senior notes |
1,500,000 | | ||||||
Proceeds from loans payable |
| 8,909 | ||||||
Repayment of capital lease and other financing obligations |
(7,673 | ) | (5,858 | ) | ||||
Repayment of loans payable |
(32,191 | ) | (77,299 | ) | ||||
Repayment of convertible debt |
| (250,007 | ) | |||||
Repayment of senior notes |
(750,000 | ) | | |||||
Debt extinguishment costs |
(80,925 | ) | | |||||
Debt issuance costs |
(20,786 | ) | (7,520 | ) | ||||
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Net cash provided by (used in) financing activities |
646,726 | (308,666 | ) | |||||
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Effect of foreign currency exchange rates on cash and cash equivalents |
(7,790 | ) | (149 | ) | ||||
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Net increase in cash and cash equivalents |
265,283 | 375,273 | ||||||
Cash and cash equivalents at beginning of period |
252,213 | 278,823 | ||||||
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Cash and cash equivalents at end of period |
$ | 517,496 | $ | 654,096 | ||||
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Supplemental cash flow information: |
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Cash paid for taxes |
$ | 76,854 | $ | 6,765 | ||||
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Cash paid for interest |
$ | 97,639 | $ | 92,301 | ||||
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See accompanying notes to condensed consolidated financial statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Equinix, Inc. (Equinix or the Company) and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the financial position and the results of operations for the interim periods presented. The condensed consolidated balance sheet data as of December 31, 2012 has been derived from audited consolidated financial statements as of that date. The consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (SEC), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America (GAAP). For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinixs Form 10-K as filed with the SEC on February 26, 2013. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.
Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Equinix and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the condensed consolidated financial statement presentation as of and for the three and six months ended June 30, 2013.
Income Taxes
The Companys effective tax rates were 16.2% and 30.1% for the six months ended June 30, 2013 and 2012, respectively. The lower effective tax rate during the six months ended June 30, 2013 was primarily due to expected lower income in the U.S. for the year as a result of the loss on debt extinguishment recorded during the period (see Note 9).
The Company is entitled to a deduction for federal and state tax purposes with respect to employee equity award activity. The reduction in income tax payable related to windfall tax benefits for employee equity awards has been reflected as an adjustment to additional paid-in capital. For the six months ended June 30, 2013, the benefits arising from employee equity award activity that resulted in an adjustment to additional paid-in capital were approximately $22,421,000.
7
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Discontinued Operations
In August 2012, the Company entered into an agreement to sell 16 of the Companys IBX data centers located throughout the U.S. to an investment group including 365 Main, Crosslink Capital, Housatonic Partners and Brightwood Capital for net proceeds of $76,458,000 (the Divestiture). The Divestiture closed in November 2012. The Companys operating results from its discontinued operations associated with the Divestiture consisted of the following (in thousands):
Three months ended |
Six months ended |
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June 30, 2012 | ||||||||
Revenues |
$ | 9,015 | $ | 17,970 | ||||
Cost of revenues |
(7,903 | ) | (15,884 | ) | ||||
Operating expenses |
(542 | ) | (1,164 | ) | ||||
Income taxes |
(220 | ) | (373 | ) | ||||
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Net income from discontinued operations |
$ | 350 | $ | 549 | ||||
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Recent Accounting Pronouncements
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-11, Disclosures about Offsetting Assets and Liabilities. This ASU requires companies to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued ASU 2013-01, clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. This ASU clarifies that the scope of ASU 2011-11 only applies to derivatives accounted for in accordance with ASC 815, Derivatives and Hedging, and securities borrowing and securities lending transactions. This new guidance is effective for interim and annual periods beginning on or after January 1, 2013 and retrospective disclosure is required for all comparative periods presented. During the three months ended March 31, 2013, the Company adopted these ASUs and their adoption did not have a material impact on its consolidated financial statements since the ASUs enhance currently required disclosures.
In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This ASU requires companies to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income when applicable or to cross-reference the reclassifications with other disclosures that provide additional detail about the reclassification made when the reclassifications are not made to net income. This ASU is effective for fiscal years and interim periods, beginning after December 15, 2012. During the three months ended March 31, 2013, the Company adopted ASU 2013-02 and the adoption did not have a material impact on its consolidated financial statements since the Company did not have material reclassifications in any periods presented.
8
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) per share (EPS) for the periods presented (in thousands, except per share amounts):
Three months ended June 30, |
Six months ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income (loss) from continuing operations |
$ | (28,129 | ) | $ | 37,290 | $ | 8,194 | $ | 71,902 | |||||||
Net income attributable to redeemable non-controlling interests |
(529 | ) | (1,193 | ) | (970 | ) | (1,481 | ) | ||||||||
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Net income (loss) from continuing operations attributable to Equinix, basic |
(28,658 | ) | 36,097 | 7,224 | 70,421 | |||||||||||
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Effect of assumed conversion of convertible debt: |
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Interest expense, net of tax |
| 1,678 | | 3,377 | ||||||||||||
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Net income (loss) from continuing operations attributable to Equinix, diluted |
$ | (28,658 | ) | $ | 37,775 | $ | 7,224 | $ | 73,798 | |||||||
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Weighted-average shares used to compute basic EPS |
49,379 | 48,016 | 49,205 | 47,485 | ||||||||||||
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Effect of dilutive securities: |
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Convertible debt |
| 3,185 | | 2,945 | ||||||||||||
Employee equity awards |
| 1,150 | 771 | 1,203 | ||||||||||||
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Weighted-average shares used to compute diluted EPS |
49,379 | 52,351 | 49,976 | 51,633 | ||||||||||||
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EPS from continuing operations attributable to Equinix: |
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EPS from continuing operations, basic |
$ | (0.58 | ) | $ | 0.75 | $ | 0.15 | $ | 1.48 | |||||||
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EPS from continuing operations, diluted |
$ | (0.58 | ) | $ | 0.72 | $ | 0.14 | $ | 1.43 | |||||||
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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, |
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2013 | 2012 | 2013 | 2012 | |||||||||||||
Shares reserved for conversion of 2.50% convertible subordinated notes |
| 368 | | 1,300 | ||||||||||||
Shares reserved for conversion of 3.00% convertible subordinated notes |
3,604 | | 3,613 | | ||||||||||||
Shares reserved for conversion of 4.75% convertible subordinated notes |
4,432 | 4,433 | 4,432 | 4,433 | ||||||||||||
Common stock related to employee equity awards |
2,124 | 137 | 122 | 100 | ||||||||||||
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10,160 | 4,938 | 8,167 | 5,833 | |||||||||||||
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9
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Change In Accounting Principle and Estimate
Change in Accounting Principle
Commencing in 2013, the Company changed its method of accounting for income taxes by excluding the effects of subsequent events that are not recognized in the Companys consolidated financial statements in determining its estimated annual effective tax rate for interim reporting periods. Prior to the change, the Companys policy was to include the effects of subsequent events that occurred subsequent to the interim balance sheet date in its estimated annual effective tax rate. The Company believes that the change is preferable as it provides consistency with the reporting of activity on a pre-tax basis and aligns with other income tax guidance which requires items such as changes in tax rates to be reflected in the period such laws become effective. In addition, the Company believes this change results in a more comparable method for interim tax accounting with other companies in its industry. This change did not have a significant impact to the Companys condensed consolidated financial statements as of and for the three months ended March 31, 2012, the three and six months ended June 30, 2012 and the three and nine months ended September 30, 2012 and as a result, the Company did not retrospectively adjust its prior periods condensed consolidated financial statements.
Change in Accounting Estimate
During the three months ended June 30, 2013, the Company reassessed the estimated period over which revenue related to non-recurring installation fees is recognized as a result of observed trends in customer contract life. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation. The Company undertook this review due to its determination that its customers were generally benefitting from their installations longer than originally anticipated and, therefore, the estimated period that revenue related to non-recurring installation fees is recognized has been extended. This change was accounted for as a change in accounting estimate on a prospective basis effective April 1, 2013. The change in the estimated period that revenue related to non-recurring installation fees is recognized had the following impact on the Companys results of operations compared to the results that would have otherwise been recorded for the three and six months ended June 30, 2013 (in thousands, except per share amounts):
Revenues |
$ | (5,835 | ) | |
Income from operations |
(5,835 | ) | ||
Net income |
(4,889 | ) | ||
EPS: |
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Basic |
(0.10 | ) | ||
Diluted |
(0.10 | ) |
10
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Balance Sheet Components
Cash, Cash Equivalents and Short-Term and Long-Term Investments
Cash, cash equivalents and short-term and long-term investments consisted of the following as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Cash and cash equivalents: |
||||||||
Cash (1) |
$ | 160,492 | $ | 150,864 | ||||
Cash equivalents: |
||||||||
Money markets |
357,004 | 98,340 | ||||||
U.S. government securities |
| 3,009 | ||||||
|
|
|
|
|||||
Total cash and cash equivalents |
517,496 | 252,213 | ||||||
|
|
|
|
|||||
Marketable securities: |
||||||||
U.S. government securities |
275,186 | 126,941 | ||||||
Corporate bonds |
175,207 | 37,975 | ||||||
U.S. government agencies securities |
120,898 | 72,979 | ||||||
Asset-backed securities |
67,200 | 6,037 | ||||||
Certificates of deposit |
59,942 | 48,386 | ||||||
Commercial paper |
998 | 1,993 | ||||||
|
|
|
|
|||||
Total marketable securities |
699,431 | 294,311 | ||||||
|
|
|
|
|||||
Total cash, cash equivalents and short-term and long-term investments |
$ | 1,216,927 | $ | 546,524 | ||||
|
|
|
|
(1) | Excludes restricted cash. |
As of June 30, 2013 and December 31, 2012, cash equivalents included investments which were readily convertible to cash and had original maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of June 30, 2013 and December 31, 2012. The maturities of securities classified as long-term investments were greater than one year and less than three years as of June 30, 2013 and December 31, 2012.
The following table summarizes the cost and estimated fair value of marketable securities based on stated effective maturities as of (in thousands):
June 30, 2013 | December 31, 2012 | |||||||||||||||
Amortized Cost |
Fair Value | Amortized Cost |
Fair Value | |||||||||||||
Due within one year |
$ | 323,436 | $ | 323,460 | $ | 166,445 | $ | 166,492 | ||||||||
Due after one year through three years |
376,555 | 375,971 | 127,795 | 127,819 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 699,991 | $ | 699,431 | $ | 294,240 | $ | 294,311 | ||||||||
|
|
|
|
|
|
|
|
11
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following table summarizes the fair value and gross unrealized gains and losses related to the Companys short-term and long-term investments in marketable securities designated as available-for-sale securities as of (in thousands):
June 30, 2013 | ||||||||||||||||
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value | |||||||||||||
U.S. government securities |
$ | 275,280 | $ | 28 | $ | (122 | ) | $ | 275,186 | |||||||
Corporate bonds |
175,504 | 17 | (314 | ) | 175,207 | |||||||||||
U.S. government agencies securities |
121,002 | 41 | (145 | ) | 120,898 | |||||||||||
Asset-backed securities |
67,291 | | (91 | ) | 67,200 | |||||||||||
Certificates of deposit |
59,918 | 24 | | 59,942 | ||||||||||||
Commercial paper |
996 | 2 | | 998 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 699,991 | $ | 112 | $ | (672 | ) | $ | 699,431 | |||||||
|
|
|
|
|
|
|
|
December 31, 2012 | ||||||||||||||||
Amortized cost |
Gross unrealized gains |
Gross unrealized losses |
Fair value | |||||||||||||
U.S. government securities |
$ | 126,938 | $ | 40 | $ | (37 | ) | $ | 126,941 | |||||||
U.S. government agencies securities |
72,948 | 68 | (37 | ) | 72,979 | |||||||||||
Certificates of deposit |
48,373 | 18 | (5 | ) | 48,386 | |||||||||||
Corporate bonds |
37,954 | 29 | (8 | ) | 37,975 | |||||||||||
Asset-backed securities |
6,036 | 2 | (1 | ) | 6,037 | |||||||||||
Commercial paper |
1,991 | 2 | | 1,993 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 294,240 | $ | 159 | $ | (88 | ) | $ | 294,311 | |||||||
|
|
|
|
|
|
|
|
While certain marketable securities carry unrealized losses, the Company expects that it will receive both principal and interest according to the stated terms of each of the securities and that the decline in market value is primarily due to changes in the interest rate environment from the time the securities were purchased as compared to interest rates at June 30, 2013.
The following table summarizes the fair value and gross unrealized losses related to 238 available-for-sale securities with an aggregate cost basis of $421,280,000 aggregated by type of investment and length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2013 (in thousands):
Securities in a loss position for less than 12 months |
Securities in a loss position for 12 months or more |
|||||||||||||||
Fair value | Gross unrealized losses |
Fair value |
Gross unrealized losses |
|||||||||||||
Corporate bonds |
$ | 148,054 | $ | (313 | ) | $ | | $ | | |||||||
Asset-backed securities |
64,863 | (91 | ) | | | |||||||||||
U.S. government securities |
165,152 | (122 | ) | | | |||||||||||
U.S. government agencies securities |
40,544 | (130 | ) | 2,956 | (16 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 418,613 | $ | (656 | ) | $ | 2,956 | $ | (16 | ) | |||||||
|
|
|
|
|
|
|
|
While the Company does not believe that as of June 30, 2013, it holds investments that are other-than-temporarily impaired and believes that the Companys investments will mature at par, the Companys investments are subject to changes in market conditions. If market conditions were to deteriorate, the
12
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Company could sustain other-than-temporary impairments to its investment portfolio which could result in additional realized losses being recorded in interest income, net, or securities markets could become inactive which could affect the liquidity of the Companys investments.
Accounts Receivable
Accounts receivables, net, consisted of the following as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Accounts receivable |
$ | 330,585 | $ | 290,326 | ||||
Unearned revenue |
(125,753 | ) | (122,770 | ) | ||||
Allowance for doubtful accounts |
(3,496 | ) | (3,716 | ) | ||||
|
|
|
|
|||||
$ | 201,336 | $ | 163,840 | |||||
|
|
|
|
Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The Company generally invoices its customers at the end of a calendar month for services to be provided the following month. Accordingly, unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers in advance in accordance with the terms of their contract.
Other Current Assets
Other current assets consisted of the following as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Prepaid expenses |
$ | 20,679 | $ | 21,349 | ||||
Other receivables |
9,301 | 3,428 | ||||||
Deferred tax assets, net |
8,107 | 8,107 | ||||||
Taxes receivable |
7,479 | 8,829 | ||||||
Restricted cash |
4,302 | 9,380 | ||||||
Derivative instruments |
2,573 | 3,205 | ||||||
Other current assets |
2,876 | 2,908 | ||||||
|
|
|
|
|||||
$ | 55,317 | $ | 57,206 | |||||
|
|
|
|
13
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Property, Plant and Equipment
Property, plant and equipment consisted of the following as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
IBX plant and machinery |
$ | 2,441,901 | $ | 2,304,360 | ||||
Leasehold improvements |
1,101,328 | 1,078,834 | ||||||
Buildings |
980,768 | 754,139 | ||||||
IBX equipment |
444,426 | 410,456 | ||||||
Site improvements |
424,997 | 352,367 | ||||||
Computer equipment and software |
169,614 | 150,382 | ||||||
Land |
113,852 | 98,007 | ||||||
Furniture and fixtures |
21,374 | 21,982 | ||||||
Construction in progress |
217,535 | 379,750 | ||||||
|
|
|
|
|||||
5,915,795 | 5,550,277 | |||||||
Less accumulated depreciation |
(1,812,451 | ) | (1,631,278 | ) | ||||
|
|
|
|
|||||
$ | 4,103,344 | $ | 3,918,999 | |||||
|
|
|
|
IBX plant and machinery, leasehold improvements, buildings, computer equipment and software and construction in progress recorded under capital leases aggregated $294,900,000 and $149,923,000 as of June 30, 2013 and December 31, 2012, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $48,654,000 and $42,272,000 as of June 30, 2013 and December 31, 2012, respectively.
Goodwill and Intangible Assets
Goodwill and intangible assets, net, consisted of the following as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Goodwill: |
||||||||
Americas |
$ | 476,213 | $ | 482,765 | ||||
EMEA |
400,474 | 423,529 | ||||||
Asia-Pacific |
135,415 | 136,270 | ||||||
|
|
|
|
|||||
$ | 1,012,102 | $ | 1,042,564 | |||||
|
|
|
|
|||||
Intangible assets: |
||||||||
Intangible asset customer contracts |
$ | 217,328 | $ | 222,571 | ||||
Intangible asset favorable leases |
36,927 | 37,182 | ||||||
Intangible asset others |
9,689 | 9,889 | ||||||
|
|
|
|
|||||
263,944 | 269,642 | |||||||
Accumulated amortization |
(79,204 | ) | (68,080 | ) | ||||
|
|
|
|
|||||
$ | 184,740 | $ | 201,562 | |||||
|
|
|
|
The Companys goodwill and intangible assets in EMEA, denominated in the United Arab Emirates dirham, British pounds and Euros, goodwill in Asia-Pacific, denominated in Chinese yuan, Hong Kong dollars and Singapore dollars and certain goodwill and intangibles in Americas, denominated in Canadian dollars and Brazilian reais, are subject to foreign currency fluctuations. The Companys foreign currency translation gains and losses, including goodwill and intangibles, are a component of other comprehensive income (loss).
14
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
For the three and six months ended June 30, 2013, the Company recorded amortization expense of $6,864,000 and $13,623,000, respectively, associated with its intangible assets. For the three and six months ended June 30, 2012, the Company recorded amortization expense of $4,741,000 and $9,589,000, respectively, associated with its intangible assets. The Companys estimated future amortization expense related to these intangibles is as follows (in thousands):
Year ending: |
||||
2013 (six months remaining) |
$ | 13,485 | ||
2014 |
26,688 | |||
2015 |
26,212 | |||
2016 |
25,742 | |||
2017 |
24,266 | |||
Thereafter |
68,347 | |||
|
|
|||
Total |
$ | 184,740 | ||
|
|
Other Assets
Other assets consisted of the following (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Deferred tax assets, net |
$ | 173,149 | $ | 85,232 | ||||
Debt issuance costs, net |
44,100 | 36,704 | ||||||
Prepaid expenses, non-current |
36,363 | 34,478 | ||||||
Deposits |
28,349 | 27,069 | ||||||
Restricted cash, non-current |
7,398 | 8,131 | ||||||
Derivative instruments |
3,879 | | ||||||
Other assets, non-current |
10,845 | 10,655 | ||||||
|
|
|
|
|||||
$ | 304,083 | $ | 202,269 | |||||
|
|
|
|
Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Accrued compensation and benefits |
$ | 75,234 | $ | 85,619 | ||||
Accrued interest |
54,614 | 48,436 | ||||||
Accrued taxes |
35,581 | 47,477 | ||||||
Accounts payable |
34,223 | 27,659 | ||||||
Accrued utilities and security |
23,539 | 24,974 | ||||||
Accrued professional fees |
6,150 | 6,699 | ||||||
Accrued repairs and maintenance |
4,027 | 2,938 | ||||||
Accrued other |
24,659 | 25,051 | ||||||
|
|
|
|
|||||
$ | 258,027 | $ | 268,853 | |||||
|
|
|
|
15
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Other Current Liabilities
Other current liabilities consisted of the following (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Deferred tax liabilities, net |
$ | 69,689 | $ | 69,689 | ||||
Deferred installation revenue |
24,969 | 38,187 | ||||||
Customer deposits |
13,457 | 12,927 | ||||||
Deferred recurring revenue |
7,620 | 8,910 | ||||||
Deferred rent |
5,753 | 5,410 | ||||||
Derivative instruments |
847 | 1,097 | ||||||
Accrued restructuring charges |
| 2,379 | ||||||
Other current liabilities |
536 | 962 | ||||||
|
|
|
|
|||||
$ | 122,871 | $ | 139,561 | |||||
|
|
|
|
Other Liabilities
Other liabilities consisted of the following (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Asset retirement obligations, non-current |
$ | 63,855 | $ | 63,150 | ||||
Deferred tax liabilities, net |
60,752 | 62,292 | ||||||
Deferred installation revenue, non-current |
45,804 | 26,086 | ||||||
Deferred rent, non-current |
39,466 | 41,951 | ||||||
Accrued taxes, non-current |
21,173 | 19,373 | ||||||
Customer deposits, non-current |
5,402 | 6,185 | ||||||
Deferred recurring revenue, non-current |
4,689 | 5,381 | ||||||
Derivative instruments, non-current |
39 | | ||||||
Accrued restructuring charges, non-current |
| 3,300 | ||||||
Other liabilities |
4,588 | 3,125 | ||||||
|
|
|
|
|||||
$ | 245,768 | $ | 230,843 | |||||
|
|
|
|
The Company currently leases the majority of its IBX data centers and certain equipment under non-cancelable operating lease agreements expiring through 2035. The IBX data center lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated some rent expense abatement periods for certain leases to better match the phased build-out of its IBX data centers. The Company accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.
5. Derivatives and Hedging Activities
The Company has certain embedded derivatives in its customer contracts and also employs foreign currency forward contracts to partially offset its business exposure to foreign exchange risk for certain existing foreign currency-denominated assets and liabilities and certain forecasted transactions.
Derivatives Not Designated as Hedges
Embedded Derivatives. The Company is deemed to have foreign currency forward contracts embedded in certain of the Companys customer agreements that are priced in currencies different from the functional or local currencies of the parties involved. These embedded derivatives are separated from their host
16
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
contracts and carried on the Companys balance sheet at their fair value. The majority of these embedded derivatives arise as a result of the Companys foreign subsidiaries pricing their customer contracts in the U.S. dollar.
The Company has not designated these foreign currency embedded derivatives as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these embedded derivatives are included within revenues in the Companys condensed consolidated statements of operations. During the three and six months ended June 30, 2013, the Company recognized a net gain of $1,678,000 and $4,131,000, respectively, associated with these embedded derivatives. During the three and six months ended June 30, 2012, gains (losses) from these embedded derivatives were not significant.
Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with the Companys customer agreements that are priced in currencies different from the functional or local currencies of the parties involved (economic hedges of embedded derivatives). Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date.
The Company has not designated the economic hedges of embedded derivatives as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in revenues along with gains and losses of the related embedded derivatives. The Company entered into various economic hedges of embedded derivatives during the three and six months ended June 30, 2013 and recognized a net loss of $2,091,000 and $3,095,000, respectively, for the periods then ended. The Company did not enter into any economic hedges of embedded derivatives during the three and six months ended June 30, 2012.
Foreign Currency Forward Contracts. The Company also uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the foreign currency-denominated assets and liabilities change.
The Company has not designated the foreign currency forward contracts as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and six months ended June 30, 2013 and 2012 and gains (losses) from these foreign currency forward contracts were not significant during these periods.
17
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 Companys condensed consolidated balance sheets as of June 30, 2013 (in thousands):
Gross amounts |
Gross amounts offset in the balance sheet |
Net amounts (1) |
Gross amounts not offset in the balance sheet |
Net | ||||||||||||||||
Assets: |
||||||||||||||||||||
Embedded derivatives |
$ | 5,878 | $ | | $ | 5,878 | $ | | $ | 5,878 | ||||||||||
Economic hedges of embedded derivatives |
185 | | 185 | (42 | ) | 143 | ||||||||||||||
Foreign currency forward contracts |
389 | | 389 | (270 | ) | 119 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 6,452 | $ | | $ | 6,452 | $ | (312 | ) | $ | 6,140 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||||
Embedded derivatives |
$ | 120 | $ | | $ | 120 | $ | | $ | 120 | ||||||||||
Economic hedges of embedded derivatives |
382 | | 382 | (42 | ) | 340 | ||||||||||||||
Foreign currency forward contracts |
384 | | 384 | (270 | ) | 114 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 886 | $ | | $ | 886 | $ | (312 | ) | $ | 574 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | As presented in the Companys condensed consolidated balance sheets. |
The following table presents the fair value of derivative instruments recognized in the Companys condensed consolidated balance sheets as of December 31, 2012 (in thousands):
Gross amounts |
Gross amounts offset in the balance sheet |
Net amounts (1) |
Gross amounts not offset in the balance sheet |
Net | ||||||||||||||||
Assets: |
||||||||||||||||||||
Embedded derivatives |
$ | 3,205 | $ | | $ | 3,205 | $ | | $ | 3,205 | ||||||||||
Foreign currency forward contracts |
13 | (13 | ) | | | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 3,218 | $ | (13 | ) | $ | 3,205 | $ | | $ | 3,205 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities: |
||||||||||||||||||||
Embedded derivatives |
$ | 890 | $ | | $ | 890 | $ | | $ | 890 | ||||||||||
Foreign currency forward contracts |
220 | (13 | ) | 207 | | 207 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
$ | 1,110 | $ | (13 | ) | $ | 1,097 | $ | | $ | 1,097 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | As presented in the Companys condensed consolidated balance sheets. |
18
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Fair Value Measurements
The Companys financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013 were as follows (in thousands):
Fair value
at June 30, 2013 |
Fair value measurement using |
|||||||||||
Level 1 | Level 2 | |||||||||||
Assets: |
||||||||||||
Cash |
$ | 160,492 | $ | 160,492 | $ | | ||||||
Money market and deposit accounts |
357,004 | 357,004 | | |||||||||
U.S. government securities |
275,186 | 275,186 | | |||||||||
Corporate bonds |
175,207 | | 175,207 | |||||||||
U.S. government agency securities |
120,898 | | 120,898 | |||||||||
Asset-backed securities |
67,200 | | 67,200 | |||||||||
Certificates of deposit |
59,942 | | 59,942 | |||||||||
Commercial paper |
998 | | 998 | |||||||||
Derivative instruments (1) |
6,452 | | 6,452 | |||||||||
|
|
|
|
|
|
|||||||
$ | 1,223,379 | $ | 792,682 | $ | 430,697 | |||||||
|
|
|
|
|
|
|||||||
Liabilities: |
||||||||||||
Derivative instruments (1) |
$ | 886 | $ | | $ | 886 | ||||||
|
|
|
|
|
|
(1) | Includes embedded derivatives, economic hedges of embedded derivatives and foreign currency forward contracts. Amounts are included within other current assets, other assets, other current liabilities and other liabilities in the Companys accompanying condensed consolidated balance sheet. |
The Company did not have any Level 3 financial assets or financial liabilities as of June 30, 2013.
Valuation Methods
Fair value estimates are made as of a specific point in time based on methods using present value or other valuation techniques. These techniques involve uncertainties and are affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors.
Cash, Cash Equivalents and Investments. The fair value of the Companys investments in money market funds approximates their face value. Such instruments are included in cash equivalents. The Companys 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 Companys other investments approximate their face value. These investments include certificates of deposit and available-for-sale debt investments related to the Companys investments in the securities of other public companies, governmental units and other agencies. The fair value of these investments is priced based on the quoted market price for similar instruments or nonbinding market prices that are corroborated by observable market data. Such instruments are classified within Level 2 of the fair value hierarchy. The Company determines the fair values of its Level 2 investments by using inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, custody bank, third-party pricing vendors, or other sources. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is responsible for its consolidated financial statements and underlying estimates.
The Company determined that the major security types held as of June 30, 2013 were primarily cash and money market funds, U.S. government and agency securities, corporate bonds, certificate of deposits,
19
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
commercial paper and asset-backed securities. The Company uses the specific identification method in computing realized gains and losses. Short-term and long-term investments are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported in stockholders equity as a component of other comprehensive income or loss, net of any related tax effect. The Company reviews its investment portfolio quarterly to determine if any securities may be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades over an extended period of time.
During the three months ended March 31, 2013, after reviewing the fair value hierarchy and its valuation criteria, the Company reclassified its U.S. government securities from within Level 2 to Level 1 of the fair value hierarchy because treasury securities issued by the U.S. government are valued using quoted prices for identical instruments in active markets.
Derivative Assets and Liabilities. For foreign currency derivatives, including embedded derivatives and economic hedges of embedded derivatives, the Company uses forward contract models employing market observable inputs, such as spot currency rates and forward points with adjustments made to these values utilizing published credit default swap rates of its foreign exchange trading counterparties. The Company has determined that the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, therefore the derivatives are categorized as Level 2.
During the six months ended June 30, 2013, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.
7. Related Party Transactions
The Company has several significant stockholders and other related parties that are also customers and/or vendors. The Companys activity of related party transactions was as follows (in thousands):
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues |
$ | 7,264 | $ | 10,189 | $ | 15,740 | $ | 15,752 | ||||||||
Costs and services |
2,068 | 692 | 4,533 | 1,027 |
As of June 30, | ||||||||
2013 | 2012 | |||||||
Accounts receivable |
$ | 4,142 | $ | 6,559 | ||||
Accounts payable |
514 | 296 |
In connection with the acquisition of ALOG Data Centers do Brasil S.A. and its subsidiaries (ALOG) (the ALOG Acquisition), the Company acquired a lease for one of the Brazilian IBX data centers in which the lessor is a member of ALOG management. This lease contains an option to purchase the underlying property for fair market value on the date of purchase. The Company accounts for this lease as a financing obligation as a result of structural building work pursuant to the accounting standard for lessees involvement in asset construction. As of June 30, 2013, the Company had a financing obligation liability totaling approximately $3,915,000 related to this lease on its condensed consolidated balance sheet. This amount is considered a related party liability, which is not reflected in the related party data presented above.
20
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Leases
Capital Lease and Other Financing Obligations
New York 2 Capital Lease
In May 2013, the Company entered into a binding purchase and sale agreement for a property located in the New York metro area (the New York IBX Data Center Acquisition). A portion of the building was leased to the Company and was being used by the Company as its New York 2 IBX data center. The lease was originally accounted for as an operating lease, and the Company had previously recorded a restructuring charge related to the lease (see Note 14). As a result of the New York IBX Data Center Acquisition, the Company accounted for the lease as a capital lease prior to the close of the acquisition in July 2013 (see Note 15). The remainder of the building was leased by another party, which became the Companys tenant upon closing. During the three months ended June 30, 2013, the Company recorded a capital lease asset and liability totaling approximately $67,288,000, which will be reversed upon the close of the New York IBX Data Center Acquisition.
Toronto 1 Capital Lease
In May 2013, the Company entered into a lease amendment for its first IBX data center in Toronto, Canada (the Toronto 1 Lease) to extend the lease term. The lease was originally accounted for as an operating lease. Pursuant to the accounting standard for leases, the Company reassessed the lease classification of the Toronto 1 Lease as a result of the lease amendment and determined that substantially all of the lease should be accounted for as a capital lease. The Company recorded a capital lease asset totaling approximately $67,346,000 and liability totaling approximately $68,370,000 during the three months ended June 30, 2013.
Singapore 2 IBX Financing
In May 2013, the Company commenced construction work to make structural changes to its leased space within its second IBX data center in Singapore (the Singapore 2 IBX Financing). The lease was originally accounted for as an operating lease. Pursuant to the accounting standard for lessees involvement in asset construction, the Company is considered the owner of the assets during the construction period. As a result, the Company recorded a building asset totaling approximately $34,749,000 and corresponding financing liability totaling approximately $36,030,000 during the three months ended June 30, 2013.
Singapore 3 IBX Financing
In March 2013, the Company entered into a lease for land and a building that the Company and the landlord will jointly develop into the Companys third IBX data center in the Singapore metro area (the Singapore 3 Lease). The Singapore 3 Lease has a term of 20 years, with an option to purchase the property. If the option to purchase the property is not exercised, the Company has options to extend the lease. The total cumulative minimum rent obligation over the term of the lease is approximately $157,396,000, exclusive of renewal periods. Pursuant to the accounting standard for lessees involvement in asset construction, the Company will be considered the owner of the building during the construction phase due to the building work that the landlord and the Company will be undertaking. As a result, the Company will record a building asset and a related financing liability, while the underlying land will be considered an operating lease, when the construction of the building commences, which is expected to occur during the third quarter of 2013.
Toronto 2 IBX Financing
In November 2012, the Company entered into a lease for land and a building that the Company and the landlord would jointly develop to meet its needs and which it would ultimately convert into its second IBX data center in the Toronto, Canada metro area (the Toronto 2 IBX Financing and the Toronto Lease). The Toronto Lease has a fixed term of 15 years, with options to renew, commencing from the date the
21
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
landlord delivers the completed building to the Company. Monthly payments under the Toronto Lease will commence in October 2015 and will be made through the end of the lease term at an effective interest rate of 8.51%. The Toronto Lease has a total cumulative minimum rent obligation of approximately $140,565,000, exclusive of renewal periods. The landlord began construction of the building to the Companys specifications in February 2013. Pursuant to the accounting standard for lessees involvement in asset construction, the Company is considered the owner of the building during the construction phase due to the building work that the landlord and the Company are undertaking. As a result, during the six months ended June 30, 2013, the Company recorded a building asset and a related financing liability totaling approximately $11,907,000, while the underlying land is considered an operating lease.
Maturities of Capital Lease and Other Financing Obligations
The Companys capital lease and other financing obligations are summarized as follows (in thousands):
Capital lease obligations |
Other financing obligations |
Total | ||||||||||
2013 (six months remaining) |
$ | 13,738 | $ | 19,092 | $ | 32,830 | ||||||
2014 |
27,873 | 42,615 | 70,488 | |||||||||
2015 |
28,397 | 46,693 | 75,090 | |||||||||
2016 |
27,914 | 50,826 | 78,740 | |||||||||
2017 |
28,264 | 50,854 | 79,118 | |||||||||
Thereafter |
305,761 | 466,995 | 772,756 | |||||||||
|
|
|
|
|
|
|||||||
Total minimum lease payments |
431,947 | 677,075 | 1,109,022 | |||||||||
Plus amount representing residual property value |
67,019 | 356,710 | 423,729 | |||||||||
Less estimated building costs |
| (46,396 | ) | (46,396 | ) | |||||||
Less amount representing interest |
(191,999 | ) | (524,221 | ) | (716,220 | ) | ||||||
|
|
|
|
|
|
|||||||
Present value of net minimum lease payments |
306,967 | 463,168 | 770,135 | |||||||||
Less current portion |
(78,391 | ) | (6,871 | ) | (85,262 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 228,576 | $ | 456,297 | $ | 684,873 | |||||||
|
|
|
|
|
|
9. Debt Facilities
Loans Payable
The Companys loans payable consisted of the following (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
U.S. term loan |
$ | 160,000 | $ | 180,000 | ||||
ALOG financing |
44,924 | 48,807 | ||||||
Paris 4 IBX financing |
317 | 8,071 | ||||||
Other loans payable |
38 | 4,084 | ||||||
|
|
|
|
|||||
205,279 | 240,962 | |||||||
Less current portion |
(40,360 | ) | (52,160 | ) | ||||
|
|
|
|
|||||
$ | 164,919 | $ | 188,802 | |||||
|
|
|
|
U.S. Financing
In February 2013, the Company entered into an amendment to a credit agreement with a group of lenders for a $750,000,000 credit facility (the U.S. Financing), comprised of a $200,000,000 term loan facility (the U.S. Term Loan) and a $550,000,000 multicurrency revolving credit facility (the U.S. Revolving Credit Line). The amendment modified certain definitions of items used in the calculation of the
22
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
financial covenants with which the Company must comply on a quarterly basis to exclude the write-off of any unamortized debt issuance costs that were incurred in connection with the issuance of the 8.125% Senior Notes; to exclude one-time transaction costs, fees, premiums and expenses incurred by the Company in connection with the issuance of the 4.875% Senior Notes and 5.375% Senior Notes and the redemption of the 8.125% Senior Notes; and to exclude the 8.125% Senior Notes provided that certain conditions in connection with the redemption of the 8.125% Senior Notes were satisfied. The amendment also postponed the step-down of the maximum senior leverage ratio covenant from the three months ended March 31, 2013 to the three months ended September 30, 2013.
Convertible Debt
The Companys convertible debt consisted of the following (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
3.00% Convertible Subordinated Notes |
$ | 395,986 | $ | 395,986 | ||||
4.75% Convertible Subordinated Notes |
373,726 | 373,730 | ||||||
|
|
|
|
|||||
769,712 | 769,716 | |||||||
Less amount representing debt discount |
(53,447 | ) | (60,990 | ) | ||||
|
|
|
|
|||||
$ | 716,265 | $ | 708,726 | |||||
|
|
|
|
3.00% Convertible Subordinated Notes
In September 2007, the Company issued $395,986,000 aggregate principal amount of 3.00% Convertible Subordinated Notes due October 15, 2014 (the 3.00% Convertible Subordinated Notes). Holders of the 3.00% Convertible Subordinated Notes may convert their notes at their option on any day up to and including the business day immediately preceding the maturity date into shares of the Companys 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 Companys 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 Companys common stock or a total of 4,711,283 shares of the Companys common stock. As of June 30, 2013, had the holders of the 3.00% Convertible Subordinated Notes converted their notes, the 3.00% Convertible Subordinated Notes would have been convertible into 3,466,917 shares of the Companys 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 Companys election, cash, shares of the Companys common stock or a combination of cash and shares of the Companys 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 Companys election, in shares of its common stock or a combination of cash and shares of its common stock. Upon conversion, if the Company elects to pay a sufficiently large portion of the conversion obligation in cash, additional consideration beyond the $373,750,000 of gross proceeds received will be required.
23
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 Companys 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 Companys 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 Companys common stock would be converted into cash or property other than securities; or |
| at any time on or after March 15, 2016. |
Holders of the 4.75% Convertible Subordinated Notes are eligible to convert their notes during the three months ended June 30, 2013 and September 30, 2013, since the Stock Price Condition Conversion Clause was met during the three months ended March 31, 2013 and June 30, 2013, respectively. As of June 30, 2013, had the holders of the 4.75% Convertible Subordinated Notes converted their notes, the 4.75% Convertible Subordinated Notes would have been convertible into a maximum of 4,432,362 shares of the Companys common stock.
Senior Notes
The Companys senior notes consisted of the following as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
5.375% senior notes due 2023 |
$ | 1,000,000 | $ | | ||||
7.00% senior notes due 2021 |
750,000 | 750,000 | ||||||
4.875% senior notes due 2020 |
500,000 | | ||||||
8.125% senior notes due 2018 |
| 750,000 | ||||||
|
|
|
|
|||||
$ | 2,250,000 | $ | 1,500,000 | |||||
|
|
|
|
4.875% Senior Notes and 5.375% Senior Notes
In March 2013, the Company issued $1,500,000,000 aggregate principal amount of senior notes, which consist of $500,000,000 aggregate principal amount of 4.875% Senior Notes due April 1, 2020 (the 4.875% Senior Notes) and $1,000,000,000 aggregate principal amount of 5.375% Senior Notes due April 1, 2023, (the 5.375% Senior Notes). Interest on both the 4.875% Senior Notes and the 5.375% Senior Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2013.
24
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The 4.875% Senior Notes and the 5.375% Senior Notes are governed by separate indentures dated March 5, 2013, between the Company, as issuer, and U.S. Bank National Association, as trustee (the Senior Notes Indentures). The Senior Notes Indentures contain covenants that limit the Companys ability and the ability of its subsidiaries to, among other things:
| incur additional debt; |
| pay dividends or make other restricted payments; |
| purchase, redeem or retire capital stock or subordinated debt; |
| make asset sales; |
| enter into transactions with affiliates; |
| incur liens; |
| enter into sale-leaseback transactions; |
| provide subsidiary guarantees; |
| make investments; and |
| merge or consolidate with any other person. |
Each of these restrictions has a number of important qualifications and exceptions. The 4.875% Senior Notes and the 5.375% Senior Notes are unsecured and rank equal in right of payment with the Companys existing or future senior debt and senior in right of payment with the Companys existing and future subordinated debt. The 4.875% Senior Notes and the 5.375% Senior Notes are effectively junior to the Companys secured indebtedness and indebtedness of its subsidiaries.
At any time prior to April 1, 2016, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 4.875% Senior Notes outstanding at a redemption price equal to 104.875% of the principal amount of the 4.875% Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that (i) at least 65% of the aggregate principal amount of the 4.875% Senior Notes issued under the 4.875% Senior Notes indenture remains outstanding immediately after the occurrence of such redemption (excluding the 4.875% Senior Notes held by the Company and its subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering.
On or after April 1, 2017, the Company may redeem all or a part of the 4.875% Senior Notes, on any one or more occasions, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below:
Redemption price of the 4.875% Senior Notes | ||||
2017 |
102.438 | % | ||
2018 |
101.219 | % | ||
2019 and thereafter |
100.000 | % |
At any time prior to April 1, 2017, the Company may also redeem all or a part of the 4.875% Senior Notes at a redemption price equal to 100% of the principal amount of the 4.875% Senior Notes redeemed plus an applicable premium (the 4.875% Senior Notes Applicable Premium), and accrued and unpaid interest, if any, to, but not including, the date of redemption (the 4.875% Senior Notes Redemption Date). The 4.875% Senior Notes Applicable Premium means the greater of:
| 1.0% of the principal amount of the 4.875% Senior Notes; and |
| the excess of: (a) the present value at such redemption date of (i) the redemption price of the 4.875% Senior Notes at April 1, 2017 as shown in the above table, plus (ii) all required interest payments due on the 4.875% Senior Notes through April 1, 2017 (excluding accrued but unpaid interest, if any, to, but not including the 4.875% Senior Notes Redemption Date), computed using a discount rate equal to the yield to maturity of the U.S. Treasury securities with a constant maturity most nearly equal to the period from the 4.875% Senior Notes Redemption Date to April 1, 2017, plus 0.50%; over (b) the principal amount of the 4.875% Senior Notes. |
25
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
At any time prior to April 1, 2016, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 5.375% Senior Notes outstanding at a redemption price equal to 105.375% of the principal amount of the 5.375% Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that (i) at least 65% of the aggregate principal amount of the 5.375% Senior Notes issued under the 5.375% Senior Notes indenture remains outstanding immediately after the occurrence of such redemption (excluding the 5.375% Senior Notes held by the Company and its subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering.
On or after April 1, 2018, the Company may redeem all or a part of the 5.375% Senior Notes, on any one or more occasions, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below:
Redemption price of the 5.375% Senior Notes | ||||
2018 |
102.688 | % | ||
2019 |
101.792 | % | ||
2020 |
100.896 | % | ||
2021 and thereafter |
100.000 | % |
At any time prior to April 1, 2018, the Company may also redeem all or a part of the 5.375% Senior Notes at a redemption price equal to 100% of the principal amount of the 5.375% Senior Notes redeemed plus an applicable premium (the 5.375% Senior Notes Applicable Premium), and accrued and unpaid interest, if any, to, but not including, the date of redemption (the 5.375% Senior Notes Redemption Date). The 5.375% Senior Notes Applicable Premium means the greater of:
| 1.0% of the principal amount of the 5.375% Senior Notes; and |
| the excess of: (a) the present value at such redemption date of (i) the redemption price of the 5.375% Senior Notes at April 1, 2018 as shown in the above table, plus (ii) all required interest payments due on the 5.375% Senior Notes through April 1, 2018 (excluding accrued but unpaid interest, if any, to, but not including the 5.375% Senior Notes Redemption Date), computed using a discount rate equal to the yield to maturity of the U.S. Treasury securities with a constant maturity most nearly equal to the period from the 5.375% Senior Notes Redemption Date to April 1, 2018, plus 0.50%; over (b) the principal amount of the 5.375% Senior Notes. |
Debt issuance costs related to the 4.875% Senior Notes and 5.375% Senior Notes, net of amortization, were $19,602,000 as of June 30, 2013. In March 2013, the Company placed $836,400,000 of the proceeds from the issuance of the 4.875% and 5.375% Senior Notes into a restricted cash account for the redemption of the 8.125% Senior Notes.
8.125% Senior Notes
In February 2010, the Company issued $750,000,000 aggregate principal amount of 8.125% Senior Notes due March 1, 2018 (the 8.125% Senior Notes). The indenture governing the 8.125% Senior Notes permitted the Company to redeem the 8.125% Senior Notes at the redemption prices set forth in the 8.125% Senior Notes indenture plus accrued and unpaid interest to, but not including the redemption date.
In April 2013, the Company redeemed the entire principal amount of the 8.125% Senior Notes pursuant to the optional redemption provisions in the indenture governing the 8.125% Senior Notes, plus accrued interest, in cash of $836,511,000, which included the applicable premium paid of $80,925,000. During the three months ended June 30, 2013, the Company recognized a loss on debt extinguishment of $93,602,000, which included the applicable premium paid, the write-off of unamortized debt issuance costs of $8,927,000 and $3,750,000 of other transaction-related fees related to the redemption of the 8.125% Senior Notes.
26
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Maturities of Debt Facilities
The following table sets forth maturities of the Companys debt, including loans payable, convertible debt and senior notes, as of June 30, 2013 (in thousands):
Year ending: |
||||
2013 (six months remaining) |
$ | 20,356 | ||
2014 |
448,821 | |||
2015 |
52,835 | |||
2016 |
373,114 | |||
2017 |
26,418 | |||
Thereafter |
2,250,000 | |||
|
|
|||
$ | 3,171,544 | |||
|
|
Fair Value of Debt Facilities
The following table sets forth the estimated fair values of the Companys loans payable, senior notes and convertible debt, including current maturities, as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Loans payable |
$ | 203,692 | $ | 238,793 | ||||
Convertible debt |
1,045,900 | 1,144,568 | ||||||
Senior notes |
2,287,925 | 1,661,400 |
The fair value of the Companys 3% Convertible Subordinated Notes and senior notes, which are traded in the public debt market, is based on quoted market prices and is classified within Level 1 of the fair value hierarchy. The fair value of the Companys loans payable and 4.75% Convertible Subordinated Notes is estimated by considering the Companys credit rating, current rates available to the Company for debt of the same remaining maturities and terms of the debt and is classified within Level 2 of the fair value hierarchy.
Interest Charges
The following table sets forth total interest costs incurred and total interest costs capitalized for the periods presented (in thousands):
Three months ended June 30, |
Six months
ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Interest expense |
$ | 61,001 | $ | 46,787 | $ | 121,332 | $ | 99,605 | ||||||||
Interest capitalized |
2,658 | 6,381 | 5,550 | 10,733 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Interest charges incurred |
$ | 63,659 | $ | 53,168 | $ | 126,882 | $ | 110,338 | ||||||||
|
|
|
|
|
|
|
|
27
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
10. Redeemable Non-Controlling Interests
The following table provides a summary of the activities of the Companys redeemable non-controlling interests (in thousands):
Balance as of December 31, 2012 |
$ | 84,178 | ||
Net income attributable to redeemable non-controlling interests |
970 | |||
Other comprehensive loss attributable to redeemable non-controlling interests |
(4,540 | ) | ||
Increase in redemption value of non-controlling interests |
16,995 | |||
Impact of foreign currency exchange |
(989 | ) | ||
|
|
|||
Balance as of June 30, 2013 |
$ | 96,614 | ||
|
|
11. Commitments and Contingencies
Legal Matters
Alleged Class Action and Shareholder Derivative Actions
On March 4, 2011, an alleged class action entitled Cement Masons & Plasterers Joint Pension Trust v. Equinix, Inc., et al., No. CV-11-1016-SC, was filed in the United States District Court for the Northern District of California, against Equinix and two of its officers. The suit asserts purported claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for allegedly misleading statements regarding the Companys business and financial results. The suit is purportedly brought on behalf of purchasers of the Companys common stock between July 29, 2010 and October 5, 2010, and seeks compensatory damages, fees and costs. Defendants filed a motion to dismiss on November 7, 2011. On March 2, 2012, the Court granted defendants motion to dismiss without prejudice and gave plaintiffs thirty days in which to amend their complaint. Pursuant to stipulation and order of the court entered on March 16, 2012, the parties agreed that plaintiffs would have up to and through May 2, 2012 to file a Second Amended Complaint. On May 2, 2012 plaintiffs filed a Second Amended Complaint asserting the same basic allegations as in the prior complaint. On June 15, 2012, defendants moved to dismiss the Second Amended Complaint. On September 19, 2012, the Court took the hearing on defendants motion to dismiss the Second Amended Complaint off calendar and notified the parties that it would make its decision on the pleadings. Subsequently, on September 24, 2012 the Court requested the parties submit supplemental briefing on or before October 9, 2012. The supplemental briefing was submitted on October 9, 2012. On December 5, 2012, the Court granted defendants motion to dismiss the Second Amended Complaint without prejudice and on January 15, 2013, Plaintiffs filed their Third Amended Complaint. On February 26, 2013, defendants moved to dismiss the Third Amended Complaint. On June 12, 2013, the Court granted defendants motion to dismiss the Third Amended Complaint and dismissed the case with prejudice. On July 3, 2013, plaintiffs stipulated that they will not appeal any prior orders issued by the Court in this action, including the Courts June 12, 2013 order dismissing the Third Amended Complaint with prejudice.
On March 8, 2011, an alleged shareholder derivative action entitled Rikos v. Equinix, Inc., et al., No. CGC-11-508940, was filed in California Superior Court, County of San Francisco, purportedly on behalf of Equinix, and naming Equinix (as a nominal defendant), the members of its board of directors, and two of its officers as defendants. The suit is based on allegations similar to those in the federal securities class action and asserts causes of action against the individual defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. By agreement and order of the court, this case has been temporarily stayed pending proceedings in the class action. On June 25, 2013, the parties entered into a stipulation dismissing the case with prejudice, and on July 11, 2013, the Court entered an order of dismissal with prejudice.
On May 20, 2011, an alleged shareholder derivative action entitled Stopa v. Clontz, et al., No. CV-11-2467-SC, was filed in the U.S. District Court for the Northern District of California, purportedly on behalf of
28
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Equinix, naming Equinix (as a nominal defendant) and the members of its board of directors as defendants. The suit is based on allegations similar to those in the federal securities class action and the state court derivative action and asserts causes of action against the individual defendants for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets. On June 10, 2011, the Court signed an order relating this case to the federal securities class action. Plaintiffs filed an amended complaint on December 14, 2011. By agreement and order of the court, this case has been temporarily stayed pending proceedings in the class action. On July 9, 2013, the parties entered into a stipulation dismissing the case with prejudice, and on July 10, 2013, the Court entered an order of dismissal with prejudice.
Other Purchase Commitments
Primarily as a result of the Companys various IBX expansion projects, as of June 30, 2013, the Company was contractually committed for $162,428,000 of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, in connection with the work necessary to open these IBX data centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of June 30, 2013, such as commitments to purchase power in select locations through the remainder of 2013 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2013 and thereafter. Such other miscellaneous purchase commitments totaled $231,068,000 as of June 30, 2013.
12. Stockholders Equity
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
Balance as of December 31, 2012 |
Net change |
Balance as of June 30, 2013 |
||||||||||
Foreign currency translation loss |
$ | (114,678 | ) | $ | (103,220 | ) | $ | (217,898 | ) | |||
Unrealized gain (loss) on available for sale securities |
41 | (360 | ) | (319 | ) | |||||||
Other comprehensive loss attributable to redeemable non-controlling interests |
13,595 | 4,540 | 18,135 | |||||||||
|
|
|
|
|
|
|||||||
$ | (101,042 | ) | $ | (99,040 | ) | $ | (200,082 | ) | ||||
|
|
|
|
|
|
Changes in foreign currencies can have a significant impact to the Companys consolidated balance sheets (as evidenced above in the Companys foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies are generally translating into more U.S. dollars when the U.S. dollar weakens or less U.S. dollars when the U.S. dollar strengthens. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to certain of the currencies of the foreign countries in which the Company operates. This overall strength of the U.S. dollar had an overall unfavorable impact on the Companys consolidated results of operations because the foreign currencies translated into less U.S. dollars. This also impacted the Companys condensed consolidated balance sheets, as amounts denominated in foreign currencies are generally translating into less U.S. dollars. In future periods, the volatility of the U.S. dollar as compared to the other currencies in which the Company operates could have a significant impact on its consolidated financial position and results of operations including the amount of revenue that the Company reports in future periods.
Stock-Based Compensation
In February and March 2013, the Compensation Committee and the Stock Award Committee of the Companys Board of Directors approved the issuance of an aggregate of 572,104 shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan, as part
29
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
of the Companys annual refresh program. These equity awards are subject to vesting provisions and have a weighted-average grant date fair value of $205.07 and a weighted-average requisite service period of 3.42 years.
The following table presents, by operating expense category, the Companys stock-based compensation expense recognized in the Companys condensed consolidated statement of operations (in thousands):
Three months ended June 30, |
Six months ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Cost of revenues |
$ | 1,794 | $ | 1,534 | $ | 3,396 | $ | 2,851 | ||||||||
Sales and marketing |
6,825 | 4,675 | 12,546 | 8,710 | ||||||||||||
General and administrative |
15,575 | 14,235 | 30,955 | 27,908 | ||||||||||||
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|
|
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|
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|
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$ | 24,194 | $ | 20,444 | $ | 46,897 | $ | 39,469 | |||||||||
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|
|
|
|
|
|
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 Companys chief operating decision-maker evaluates performance, makes operating decisions and allocates resources based on the Companys revenue and adjusted EBITDA performance both on a consolidated basis and based on these three reportable segments. The Company defines adjusted EBITDA as income or loss from continuing operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges and acquisition costs as presented below (in thousands):
Three months ended June 30, |
Six months
ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Adjusted EBITDA: |
||||||||||||||||
Americas |
$ | 152,610 | $ | 140,882 | $ | 299,140 | $ | 274,080 | ||||||||
EMEA |
49,292 | 45,205 | 98,346 | 92,089 | ||||||||||||
Asia-Pacific |
42,275 | 31,393 | 90,151 | 61,907 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total adjusted EBITDA |
244,177 | 217,480 | 487,637 | 428,076 | ||||||||||||
Depreciation, amortization and accretion expense |
(110,117 | ) | (93,274 | ) | (218,648 | ) | (183,424 | ) | ||||||||
Stock-based compensation expense |
(24,194 | ) | (20,444 | ) | (46,897 | ) | (39,469 | ) | ||||||||
Restructuring charge |
4,837 | | 4,837 | | ||||||||||||
Acquisitions costs |
(2,526 | ) | (1,666 | ) | (6,188 | ) | (2,341 | ) | ||||||||
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|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
$ | 112,177 | $ | 102,096 | $ | 220,741 | $ | 202,842 | ||||||||
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|
|
|
|
|
30
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company also provides the following additional segment disclosures (in thousands):
Three months
ended June 30, |
Six months
ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Total revenues: |
||||||||||||||||
Americas |
$ | 312,443 | $ | 288,121 | $ | 620,997 | $ | 567,250 | ||||||||
EMEA |
125,612 | 102,697 | 245,906 | 204,033 | ||||||||||||
Asia-Pacific |
87,614 | 66,431 | 178,221 | 129,211 | ||||||||||||
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|
|
|
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|
|
|||||||||
$ | 525,669 | $ | 457,249 | $ | 1,045,124 | $ | 900,494 | |||||||||
|
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|
|
|
|
|||||||||
Total depreciation and amortization: |
||||||||||||||||
Americas |
$ | 64,685 | $ | 57,988 | $ | 127,210 | $ | 114,091 | ||||||||
EMEA |
23,254 | 18,162 | 46,129 | 35,435 | ||||||||||||
Asia-Pacific |
21,174 | 16,015 | 42,907 | 31,940 | ||||||||||||
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|
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|
|||||||||
$ | 109,113 | $ | 92,165 | $ | 216,246 | $ | 181,466 | |||||||||
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|
|
|||||||||
Capital expenditures: |
||||||||||||||||
Americas |
$ | 58,272 | (1) | $ | 110,696 | $ | 103,113 | (1) | $ | 182,744 | ||||||
EMEA |
32,293 | 39,837 | 48,862 | 82,541 | ||||||||||||
Asia-Pacific |
35,258 | 45,951 | 49,515 | 76,689 | ||||||||||||
|
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|
|
|
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|
|
|||||||||
$ | 125,823 | $ | 196,484 | $ | 201,490 | $ | 341,974 | |||||||||
|
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|
|
|
|
|
|
(1) | Includes the deposit of the purchase price for the New York IBX Data Center Acquisition totaling $2,960. |
The Companys long-lived assets are located in the following geographic areas as of (in thousands):
June 30, 2013 |
December 31, 2012 |
|||||||
Americas |
$ | 2,330,425 | $ | 2,143,035 | ||||
EMEA |
995,160 | 994,912 | ||||||
Asia-Pacific |
777,759 | 781,052 | ||||||
|
|
|
|
|||||
$ | 4,103,344 | $ | 3,918,999 | |||||
|
|
|
|
Revenue information on a services basis is as follows (in thousands):
Three months ended June 30, |
Six months
ended June 30, |
|||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Colocation |
$ | 398,333 | $ | 347,227 | $ | 793,444 | $ | 682,213 | ||||||||
Interconnection |
78,353 | 65,034 | 154,344 | 127,917 | ||||||||||||
Managed infrastructure |
25,201 | 20,744 | 48,790 | 42,982 | ||||||||||||
Rental |
583 | 781 | 1,163 | 1,564 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Recurring revenues |
502,470 | 433,786 | 997,741 | 854,676 | ||||||||||||
Non-recurring revenues |
23,199 | 23,463 | 47,383 | 45,818 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 525,669 | $ | 457,249 | $ | 1,045,124 | $ | 900,494 | |||||||||
|
|
|
|
|
|
|
|
No single customer accounted for 10% or greater of the Companys revenues for the three and six months ended June 30, 2013 and 2012. No single customer accounted for 10% or greater of the Companys gross accounts receivable as of June 30, 2013 and December 31, 2012.
31
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
14. Restructuring Charges
During the three months ended June 30, 2013, the Company entered into the New York IBX Data Center Acquisition for space that the Company had previously decided to exit its lease (see Note 15). As a result, the Company recorded a reversal to its outstanding accrued restructuring charge.
A summary of the movement in the 2004 accrued restructuring charges during the six months ended June 30, 2013 is outlined as follows (in thousands):
Accrued restructuring charge as of December 31, 2012 |
$ | 5,679 | ||
Accretion expense |
137 | |||
Restructuring charge adjustments |
(4,837 | ) | ||
Cash payments |
(979 | ) | ||
|
|
|||
Accrued restructuring charge as of June 30, 2013 |
$ | | ||
|
|
15. Subsequent Events
In July 2013, the Company completed the New York IBX Data Center Acquisition for net cash consideration of approximately $73,371,000. The New York IBX Data Center Acquisition will be accounted for using the acquisition method of accounting in accordance with the accounting standard for business combinations. The preliminary purchase price allocation for the New York IBX Data Center Acquisition is not currently available as the appraisals necessary to assess fair values of assets acquired and liabilities assumed are not yet complete.
32
MANAGEMENTS 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 managements discussion and analysis of financial condition and results of operations is intended to assist readers in understanding our financial information from our managements perspective and is presented as follows:
| Overview |
| Results of Operations |
| Non-GAAP Financial Measures |
| Liquidity and Capital Resources |
| Contractual Obligations and Off-Balance-Sheet Arrangements |
| Critical Accounting Policies and Estimates |
| Recent Accounting Pronouncements |
In April 2013, as more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we redeemed all of our $750.0 million 8.125% senior notes, plus accrued interest, with $836.5 million in cash, which includes the applicable premium paid of $80.9 million. During the three months ended June 30, 2013, we recognized a loss on debt extinguishment of $93.6 million, which included the applicable premium paid, the write-off of unamortized debt issuance costs of $8.9 million and $3.8 million of other transaction-related fees related to the redemption of the 8.125% senior notes.
In March 2013, as more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we issued $1.5 billion aggregate principal amount of senior notes, which is referred to as the senior notes offering, consisting of $500.0 million aggregate principal amount of 4.875% senior notes due April 1, 2020, which are referred to as the 4.875% senior notes, and $1.0 billion aggregate principal amount of 5.375% senior notes due April 1, 2023, which are referred to as the 5.375% senior notes. We used a portion of the net proceeds from the senior notes offering for the redemption of our 8.125% senior notes and intend to use the remaining net proceeds for general corporate purposes, including the funding of our expansion activities and distributions to our stockholders in connection with our proposed conversion to a real estate investment trust, which is referred to as a REIT.
Overview
Equinix provides global data center services that protect and connect the worlds most valued information assets. Global enterprises, financial services companies, and content and network service providers rely upon Equinixs leading insight and data centers in 31 markets around the world for the safehousing of their critical IT equipment and the ability to directly connect to the networks that enable todays information-driven economy. Equinix offers the following solutions: (i) premium data center
33
colocation, (ii) interconnection and (iii) exchange and outsourced IT infrastructure services. As of June 30, 2013, we operated or had partner IBX data centers in the Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, Miami, New York, Philadelphia, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, Toronto and Washington, D.C. metro areas in the Americas region; France, Germany, Italy, the Netherlands, Switzerland, the United Arab Emirates and the United Kingdom in the EMEA region; and Australia, Hong Kong, Indonesia, Japan, China and Singapore in the Asia-Pacific region.
We leverage our global data centers in 31 markets around the world as a global platform which allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global platform and the quality of our IBX data centers, we believe we have established a critical mass of customers. As more customers locate in our IBX data centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our offerings. These partners, in turn, pull in their business partners, creating a marketplace for their services. Our global platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange thus lowering overall cost and increasing flexibility. Our focused business model is based on our critical mass of customers and the resulting marketplace effect. This global platform, combined with our strong financial position, continues to drive new customer growth and bookings as we drive scale into our global business.
Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services with their colocation offerings. The data center market landscape has evolved to include cloud computing/utility providers, application hosting providers and systems integrators, managed infrastructure hosting providers and colocation providers with over 350 companies providing data center solutions in the U.S. alone. Each of these data center solutions providers can bundle various colocation, interconnection and network offerings, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 15 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of offerings.
Excluding the impact of acquisitions of the Dubai IBX data center, Asia Tone Limited, referred to as Asia Tone, and ancotel GmbH, referred to as ancotel, our customer count increased to approximately 6,354 as of June 30, 2013 versus approximately 5,854 as of June 30, 2012, an increase of 9%. This increase was due to organic growth in our business. Our utilization rate represents the percentage of our cabinet space billing versus net sellable cabinet space available, taking into account power limitations. Excluding Asia Tone and ancotel, our utilization rate decreased to approximately 77% as of June 30, 2013 versus approximately 80% as of June 30, 2012; however, excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our utilization rate would have been approximately 80% as of June 30, 2013. Our utilization rate varies from market to market among our IBX data centers across the Americas, EMEA and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows.
Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and offerings. As was the case with our recent expansions and acquisitions, our expansion criteria will be dependent on a number of factors such as demand from new and existing customers, quality of the design, power capacity, access to networks, capacity availability in
34
the current market location, amount of incremental investment required by us in the targeted property, lead-time to break-even on a free cash flow basis and in-place customers. Like our recent expansions and acquisitions, the right combination of these factors may be attractive to us. Depending on the circumstances, these transactions may require additional capital expenditures funded by upfront cash payments or through long-term financing arrangements in order to bring these properties up to Equinix standards. Property expansion may be in the form of purchases of real property, long-term leasing arrangements or acquisitions. Future purchases, construction or acquisitions may be completed by us or with partners or potential customers to minimize the outlay of cash, which can be significant.
Our business is based on a recurring revenue model comprised of colocation and related interconnection and managed infrastructure offerings. We consider these offerings recurring because our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three years in length. Our recurring revenues have comprised more than 90% of our total revenues during the past three years. In addition, during the past three years, in any given quarter, greater than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth.
Our non-recurring revenues are primarily comprised of installation services related to a customers initial deployment and professional services that we perform. These services are considered to be non-recurring because they are billed typically once and upon completion of the installation or professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the expected life of the installation. Additionally, revenue from contract settlements, when a customer wishes to terminate their contract early, is recognized when no remaining performance obligations exist and collectability is reasonably assured, to the extent that the revenue has not previously been recognized. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future. As more fully described in Note 3 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, during the three months ended June 30, 2013, we determined that our customers were generally benefitting from their installations longer than originally anticipated and, therefore, the estimated period that revenue related to non-recurring installation fees is recognized has been extended.
Our Americas revenues are derived primarily from colocation and related interconnection offerings, and our EMEA and Asia-Pacific revenues are derived primarily from colocation and managed infrastructure services.
The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX data centers, utility costs, including electricity and bandwidth, IBX data center employees salaries and benefits, including stock-based compensation, repairs and maintenance, supplies and equipment and security services. A substantial majority of our cost of revenues is fixed in nature and should not vary significantly from period to period, unless we expand our existing IBX data centers or open or acquire new IBX data centers. However, there are certain costs which are considered more variable in nature, including utilities and supplies, that are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, will generally increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by the customer. In addition, the cost of electricity is generally higher in the summer months as compared to other times of the year. To the extent we incur increased utility costs, such increased costs could materially impact our financial condition, results of operations and cash flows. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change, such increased costs could materially impact our financial condition, results of operations and cash flows.
Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including stock-based compensation, sales commissions, marketing programs, public relations, promotional materials and travel, as well as bad debt expense and amortization of customer contract intangible assets.
35
General and administrative expenses consist primarily of salaries and related expenses, including stock-based compensation, accounting, legal and other professional service fees, and other general corporate expenses such as our corporate regional headquarters office leases and some depreciation expense.
Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of revenues over time, although we expect each of them to grow in absolute dollars in connection with our growth. This is evident in the trends noted below in our discussion about our results of operations. However, for cost of revenues, this trend may periodically be impacted when a large expansion project opens or is acquired and before it starts generating any meaningful revenue. Furthermore, in relation to cost of revenues, we note that the Americas region has a lower cost of revenues as a percentage of revenue than either EMEA or Asia-Pacific. This is due to both the increased scale and maturity of the Americas region compared to either the EMEA or Asia-Pacific region, as well as a higher cost structure outside of the Americas, particularly in EMEA. While we expect all three regions to continue to see lower cost of revenues as a percentage of revenues in future periods, we expect the trend of the Americas having the lowest cost of revenues as a percentage of revenues to continue. As a result, to the extent that revenue growth outside the Americas grows in greater proportion than revenue growth in the Americas, our overall cost of revenues as a percentage of revenues may increase in future periods. Sales and marketing expenses and general and administrative expenses may also periodically increase as a percentage of revenues as we continue to scale our operations to support our growth.
Potential REIT Conversion
On September 13, 2012, we announced that our board of directors approved a plan for Equinix to pursue conversion to a REIT. We have begun implementation of the REIT conversion, and we plan to make a tax election for REIT status for the taxable year beginning January 1, 2015. Any REIT election made by us must be effective as of the beginning of a taxable year; therefore, as a calendar year taxpayer, if we are unable to convert to a REIT by January 1, 2015, the next possible conversion date would be January 1, 2016.
If we are able to convert to and qualify as a REIT, we will generally be permitted to deduct from federal income taxes the dividends we pay to our stockholders. The income represented by such dividends would not be subject to federal taxation at the entity level but would be taxed, if at all, at the stockholder level. Nevertheless, the income of our domestic taxable REIT subsidiaries, or TRS, which will hold our U.S. operations that may not be REIT-compliant, will be subject, as applicable, to federal and state corporate income tax. Likewise, our foreign subsidiaries will continue to be subject to foreign income taxes in jurisdictions in which they hold assets or conduct operations, regardless of whether held or conducted through TRS or through qualified REIT subsidiaries, or QRS. We will also be subject to a separate corporate income tax on any gains recognized during a specified period (generally 10 years) following the REIT conversion that are attributable to built-in gains with respect to the assets that we own on the date we convert to a REIT. Our ability to qualify as a REIT will depend upon our continuing compliance following our REIT conversion with various requirements, including requirements related to the nature of our assets, the sources of our income and the distributions to our stockholders. If we fail to qualify as a REIT, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property. In particular, while state income tax regimes often parallel the federal income tax regime for REITs described above, many states do not completely follow federal rules and some may not follow them at all.
The REIT conversion implementation currently includes seeking a private letter ruling, or PLR, from the IRS. Our PLR request has multiple components, and the conversion to a REIT will require favorable rulings from the IRS on numerous technical tax issues, including classification of our data center assets
36
as qualified real estate assets. We submitted the PLR request to the IRS in the fourth quarter of 2012. In the course of our communications with the IRS relating to our PLR request, the IRS informed us that it has convened an internal working group to study the current legal standards the IRS uses to define real estate for purposes of the REIT provisions of the Internal Revenue Code of 1986, as amended (the Code) and that, pending the completion of the study, the IRS is unlikely to issue PLRs on what constitutes real estate for REIT purposes. While we anticipate that the formation of the IRS working group may delay receipt of our PLR from the IRS, we do not expect any such potential delay will affect the timing of our plan to elect REIT status for the taxable year beginning January 1, 2015.
We currently estimate that we will incur approximately $50.0 to $80.0 million in costs to support the REIT conversion, in addition to related tax liabilities associated with a change in our method of depreciating and amortizing various data center assets for tax purposes from our prior methods to current methods that are more consistent with the characterization of such assets as real property for REIT purposes. The total recapture of depreciation and amortization expenses across all relevant assets is expected to result in federal and state tax liability of approximately $340.0 to $420.0 million, which amount will be payable in the four-year period starting in 2012 even if we abandon the REIT conversion for any reason, including the failure to receive the PLR we are seeking. Prior to the decision to convert to a REIT, our balance sheet reflected our income tax liability as a non-current deferred tax liability. As a result of the decision to convert to a REIT, our non-current tax liability has been and will continue to be gradually and proportionally reclassified from non-current to current over the four-year period, which started in the third quarter of 2012. The current liability reflects the tax liability that relates to additional taxable income expected to be recognized within the twelve-month period from the date of the balance sheet. If the REIT conversion is successful, we also expect to incur an additional $5.0 to $10.0 million in annual compliance costs in future years. We expect to pay between $150.0 to $180.0 million in cash taxes during 2013.
Results of Operations
Our results of operations for three and six months ended June 30, 2013 include the operations of ancotel, Asia Tone and the Dubai IBX data center.
Constant Currency Presentation
Our revenues and certain operating expenses (cost of revenues, sales and marketing and general and administrative expenses) from our international operations have represented and will continue to represent a significant portion of our total revenues and certain operating expenses. As a result, our revenues and certain operating expenses have been and will continue to be affected by changes in the U.S. dollar against major international currencies such as the Brazilian reais, British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen, Singapore dollar and United Arab Emirates dirham. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present period-over-period percentage changes in our revenues and certain operating expenses on a constant currency basis in addition to the historical amounts as reported. Presenting constant currency results of operations is a non-GAAP financial measure and is not meant to be considered in isolation or as an alternative to GAAP results of operations. However, we have presented this non-GAAP financial measure to provide investors with an additional tool to evaluate our operating results. To present this information, our current and comparative prior period revenues and certain operating expenses from entities reporting in currencies other than the U.S. dollar are converted into U.S. dollars at constant exchange rates rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the three months ended June 30, 2012 are used as exchange rates for the three months ended June 30, 2013 when comparing the three months ended June 30, 2013 with the three months ended June 30, 2012 and average rates in effect for the six months ended June 30, 2012 are used as exchange rates for the six months ended June 30, 2013 when comparing the six months ended June 30, 2013 with the six months ended June 30, 2012).
37
Three Months Ended June 30, 2013 and 2012
Revenues. Our revenues for the three months ended June 30, 2013 and 2012 were generated from the following revenue classifications and geographic regions (dollars in thousands):
Three months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
|||||||||||||||||||
Americas: |
||||||||||||||||||||||||
Recurring revenues |
$ | 300,758 | 57 | % | $ | 275,813 | 60 | % | 9 | % | 10 | % | ||||||||||||
Non-recurring revenues |
11,685 | 2 | % | 12,308 | 3 | % | (5 | %) | (5 | %) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
312,443 | 59 | % | 288,121 | 63 | % | 8 | % | 9 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
EMEA: |
||||||||||||||||||||||||
Recurring revenues |
118,642 | 23 | % | 95,610 | 22 | % | 24 | % | 25 | % | ||||||||||||||
Non-recurring revenues |
6,970 | 1 | % | 7,087 | 1 | % | (2 | %) | 2 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
125,612 | 24 | % | 102,697 | 23 | % | 22 | % | 23 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Asia-Pacific: |
||||||||||||||||||||||||
Recurring revenues |
83,070 | 16 | % | 62,363 | 13 | % | 33 | % | 38 | % | ||||||||||||||
Non-recurring revenues |
4,544 | 1 | % | 4,068 | 1 | % | 12 | % | 14 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
87,614 | 17 | % | 66,431 | 14 | % | 32 | % | 36 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total: |
||||||||||||||||||||||||
Recurring revenues |
502,470 | 96 | % | 433,786 | 95 | % | 16 | % | 17 | % | ||||||||||||||
Non-recurring revenues |
23,199 | 4 | % | 23,463 | 5 | % | (1 | %) | 0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 525,669 | 100 | % | $ | 457,249 | 100 | % | 15 | % | 16 | % | |||||||||||||
|
|
|
|
|
|
|
|
Americas Revenues. Growth in Americas revenues was primarily due to (i) $10.3 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Dallas, Los Angeles, Miami, New York, Seattle and Washington, D.C. metro areas and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $3.4 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Dallas, Rio de Janeiro, Silicon Valley, Toronto and Washington, D.C. metro areas, which are expected to open during the remainder of 2013 and 2014. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
EMEA Revenues. Our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 36% and 38%, respectively, of the regional revenues during the three months ended June 30, 2013 and 2012. Our EMEA revenue growth was due to (i) $6.7 million of additional revenue from the impact of the ancotel and Dubai IBX data center acquisitions, (ii) approximately $9.8 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, London, Paris and Zurich metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $1.5 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened
38
IBX data centers or IBX data center expansions and additional expansions currently taking place in the Frankfurt and London metro areas, which are expected to open during the remainder of 2013. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 35% and 40%, respectively, of the regional revenues for the three months ended June 30, 2013 and 2012. Our Asia-Pacific revenue growth was due to (i) $13.5 million of additional revenue from the impact of the Asia Tone acquisition, (ii) approximately $2.4 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $883,000 decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the three months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the three months ended June 30, 2012, resulting in approximately $3.0 million of unfavorable foreign currency impact to our Asia-Pacific revenues during the three months ended June 30, 2013 when compared to average exchange rates of the three months ended June 30, 2012. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and additional expansions currently taking place in the Hong Kong, Osaka, Tokyo, Singapore and Sydney metro areas, which are expected to open during the remainder of 2013 and 2014. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
Cost of Revenues. Our cost of revenues for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):
Three months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
|||||||||||||||||||
Americas. |
$ | 147,405 | 55 | % | $ | 131,879 | 59 | % | 12 | % | 12 | % | ||||||||||||
EMEA |
68,248 | 26 | % | 54,177 | 24 | % | 26 | % | 27 | % | ||||||||||||||
Asia-Pacific |
52,040 | 19 | % | 39,233 | 17 | % | 33 | % | 38 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 267,693 | 100 | % | $ | 225,289 | 100 | % | 19 | % | 20 | % | ||||||||||||
|
|
|
|
|
|
|
|
Three months ended June 30, |
||||||||
2013 | 2012 | |||||||
Cost of revenues as a percentage of revenues: |
||||||||
Americas . |
47 | % | 46 | % | ||||
EMEA |
54 | % | 53 | % | ||||
Asia-Pacific |
59 | % | 59 | % | ||||
Total |
51 | % | 49 | % |
Americas Cost of Revenues. Our Americas cost of revenues for the three months ended June 30, 2013 and 2012 included $55.0 million and $48.2 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (862 Americas cost of revenues employees as of June 30, 2013 versus 822 as of June 30, 2012), higher repairs and maintenance expense and higher costs associated with certain custom services provided to our customers. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas cost of revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. We expect Americas cost of revenues to increase as we continue to grow our business.
39
EMEA Cost of Revenues. Our EMEA cost of revenues for the three months ended June 30, 2013 and 2012 included $20.2 million and $16.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in our EMEA cost of revenues was primarily due to the impact of the ancotel and Dubai IBX data center acquisitions, which resulted in $2.8 million of additional cost of revenues for the three months ended June 30, 2013, as well as $2.4 million of higher utility costs, higher costs associated with certain custom services provided to our customers and higher compensation costs. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA cost of revenues was not significant when compared to average exchange rates of the three months ended June 30, 2012. We expect EMEA cost of revenues to increase as we continue to grow our business.
Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the three months ended June 30, 2013 and 2012 included $19.9 million and $15.5 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and the Asia Tone acquisition. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily due to the impact of the Asia Tone acquisition, which resulted in $6.0 million of additional cost of revenues, and higher utility costs. During the three months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the three months ended June 30, 2012, resulting in approximately $2.1 million of favorable foreign currency impact to our Asia-Pacific cost of revenues during the three months ended June 30, 2013 when compared to average exchange rates of the three months ended June 30, 2012. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.
Sales and Marketing Expenses. Our sales and marketing expenses for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):
Three months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
|||||||||||||||||||
Americas. |
$ | 33,978 | 57 | % | $ | 29,907 | 63 | % | 14 | % | 14 | % | ||||||||||||
EMEA |
17,164 | 29 | % | 11,365 | 24 | % | 51 | % | 52 | % | ||||||||||||||
Asia-Pacific |
8,336 | 14 | % | 6,331 | 13 | % | 32 | % | 35 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 59,478 | 100 | % | $ | 47,603 | 100 | % | 25 | % | 26 | % | ||||||||||||
|
|
|
|
|
|
|
|
Three months ended June 30, |
||||||||
2013 | 2012 | |||||||
Sales and marketing expenses as a percentage of revenues: |
||||||||
Americas. . |
11 | % | 10 | % | ||||
EMEA |
14 | % | 11 | % | ||||
Asia-Pacific |
10 | % | 10 | % | ||||
Total |
11 | % | 10 | % |
Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $3.7 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (349 Americas sales and marketing employees as of June 30, 2013 versus 287 as of June 30, 2012) and higher advertising and promotion costs. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the past several years, we have
40
been investing in our Americas sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in Americas sales and marketing initiatives, we believe our Americas sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.
EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to (i) $2.6 million of additional sales and marketing expenses from the impact of the ancotel and Dubai IBX data center acquisitions and (ii) $2.3 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (172 EMEA sales and marketing employees, excluding the impact of acquisitions, as of June 30, 2013 versus 143 as of June 30, 2012). For the three months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the past several years, we have been investing in our EMEA sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our EMEA sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, we believe our EMEA sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.
Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $1.2 million of additional sales and marketing expenses from the impact of the Asia Tone acquisition. For the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the past several years, we have been investing in our Asia-Pacific sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Asia-Pacific sales and marketing expenses have increased. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.
General and Administrative Expenses. Our general and administrative expenses for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):
Three months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 61,695 | 69 | % | $ | 59,664 | 74 | % | 3 | % | 4 | % | ||||||||||||
EMEA |
17,397 | 20 | % | 12,952 | 16 | % | 34 | % | 36 | % | ||||||||||||||
Asia-Pacific |
9,540 | 11 | % | 7,979 | 10 | % | 20 | % | 21 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 88,632 | 100 | % | $ | 80,595 | 100 | % | 10 | % | 10 | % | ||||||||||||
|
|
|
|
|
|
|
|
Three months ended June 30, |
||||||||
2013 | 2012 | |||||||
General and administrative expenses as a percentage of revenues: |
||||||||
Americas |
20 | % | 21 | % | ||||
EMEA |
14 | % | 13 | % | ||||
Asia-Pacific |
11 | % | 12 | % | ||||
Total |
17 | % | 18 | % |
41
Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $2.9 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (707 Americas general and administrative employees as of June 30, 2013 versus 642 as of June 30, 2012), partially offset by lower professional fees. During the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the course of the past year, we have been investing in our Americas general and administrative functions to scale this region effectively for growth, which has included additional investments into improving our back office systems. We expect our current efforts to improve our back office systems will continue over the next several years. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including this investment in our back office systems and the REIT conversion process.
EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to $2.4 million of higher professional fees, additional general and administrative expenses from the impact of the ancotel acquisition and higher compensation costs. The impact of foreign currency fluctuations to our EMEA general and administrative expenses for the three months ended June 30, 2013 was not significant when compared to average exchange rates of the three months ended June 30, 2012. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to additional general and administrative expenses from the impact of the Asia Tone acquisition and higher compensation costs. For the three months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the three months ended June 30, 2012. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Restructuring Charge. During the three months ended June 30, 2013, we recorded a $4.8 million reversal of the restructuring charge accrual for our excess space in the New York 2 IBX data center as a result of our decision to purchase this property and utilize the space. During the three months ended June 30, 2012, we did not record any restructuring charge.
Acquisition Costs. During the three months ended June 30, 2013, we recorded acquisition costs totaling $2.5 million primarily attributed to Americas region. During the three months ended June 30, 2012, we recorded acquisition costs totaling $1.7 million primarily attributed to the ancotel and Asia Tone acquisitions.
Interest Income. Interest income was $917,000 and $963,000, respectively, for the three months ended June 30, 2013 and 2012. The average annualized yield for the three months ended June 30, 2013 was 0.27% versus 0.24% for the three months ended June 30, 2012. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a continued low interest rate environment and a portfolio more weighted towards short-term securities.
Interest Expense. Interest expense increased to $61.0 million for the three months ended June 30,
42
2013 from $46.8 million for the three months ended June 30, 2012. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013, $5.4 million of higher interest expense from various capital lease and other financing obligations to support our expansion projects and less capitalized interest expense, which was partially offset by the redemption of our 8.125% senior notes in April 2013. During the three months ended June 30, 2013 and 2012, we capitalized $2.7 million and $6.4 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our $1.5 billion senior notes offering, partially offset by the redemption of our 8.125% senior notes, which will contribute approximately $17.7 million in incremental interest expense annually. However, we may incur additional indebtedness to support our growth, resulting in higher interest expense.
Other Income (Expense). We recorded $2.8 million of other income and $1.8 million of other expense, respectively, for the three months ended June 30, 2013 and 2012, primarily due to foreign currency exchange gains and losses during the periods.
Loss on Debt Extinguishment. During the three months ended June 30, 2013, we recorded a $93.6 million loss on debt extinguishment as a result of the redemption of our $750.0 million 8.125% senior notes. During the three months ended June 30, 2012, we did not have any loss on debt extinguishment.
Income Taxes. For the three months ended June 30, 2013, we recorded $10.6 million of income tax benefit primarily due to the $93.6 million loss on debt extinguishment. For the three months ended June 30, 2012, we recorded $17.1 million of income tax expense. Our effective tax rates were 27.4% and 31.5%, respectively, for the three months ended June 30, 2013 and 2012. The 2013 income tax provision is expected to be lower than 2012 primarily due to the loss on debt extinguishment recorded during the three months ended June 30, 2013 and the corporate structure reorganization in the EMEA region, as discussed below. We expect cash income taxes during the remainder of 2013 will primarily be related to the impact of recognizing the depreciation and amortization recapture as a result of changing our method of depreciating and amortizing various data center assets for tax purposes in connection with our REIT conversion plan. The cash taxes for 2013 and 2012 are primarily for U.S. federal and state income taxes and foreign income taxes in certain foreign jurisdictions.
To better align our EMEA corporate structure and intercompany relationship with the nature of our business activities and regional centralization, we commenced certain reorganization activities during the fourth quarter of 2012 in the EMEA region. The new organizational structure will centralize the majority of our EMEA business management activities in the Netherlands effective July 1, 2013. As a result, we expect our overall effective tax rate will be lower in subsequent periods as the new structure begins to take full effect. Assuming a successful conversion to a REIT, and no material changes to tax rules and regulations, we expect our effective long-term worldwide cash tax rate to ultimately decrease to a range of 10% to 15%.
Net Income from Discontinued Operations. During the three months ended June 30, 2013, we did not have any discontinued operations. For the three months ended June 30, 2012, our net income from discontinued operations was $350,000. For additional information, see Discontinued Operations in Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
43
Adjusted EBITDA. Adjusted EBITDA is a key factor in how we assess the performance of our segments, measure the operational cash generating abilities of our segments and develop regional growth strategies such as IBX data center expansion decisions. Our adjusted EBITDA for the three months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):
Three months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
|||||||||||||||||||
Americas |
$ | 152,610 | 63 | % | $ | 140,882 | 65 | % | 8 | % | 9 | % | ||||||||||||
EMEA |
49,292 | 20 | % | 45,205 | 21 | % | 9 | % | 9 | % | ||||||||||||||
Asia-Pacific |
42,275 | 17 | % | 31,393 | 14 | % | 35 | % | 39 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total |
$ | 244,177 | 100 | % | $ | 217,480 | 100 | % | 12 | % | 13 | % | ||||||||||||
|
|
|
|
|
|
|
|
Americas Adjusted EBITDA. The increase in our Americas adjusted EBITDA was due to our improved income from continuing operations, as the growth in revenues exceeded the increase in operating expenses after excluding depreciation expense, amortization expense, accretion expense, stock-based compensation, restructuring charges and acquisition costs, which are excluded from adjusted EBITDA.
EMEA Adjusted EBITDA. The increase in our EMEA adjusted EBITDA was primarily due to the impact of the Dubai IBX data center and ancotel acquisitions, which generated $1.6 million of adjusted EBITDA during the three months ended June 30, 2013. Additionally, the increase was due to our improved income from continuing operations, as the growth in revenues exceeded the increase in operating expenses after excluding depreciation expense, amortization expense, accretion expense, stock-based compensation and acquisition costs, which are excluded from adjusted EBITDA.
Asia-Pacific Adjusted EBITDA. Our Asia-Pacific adjusted EBITDA for the three months ended June 30, 2013, included $6.8 million of adjusted EBITDA from the impact of the Asia Tone acquisition. Additionally, the increase was due to our improved income from continuing operations. The growth in revenues exceeded the increase in operating expenses after excluding depreciation expense, amortization expense, accretion expense, stock-based compensation and acquisition costs, which are excluded from adjusted EBITDA.
44
Six Months Ended June 30, 2013 and 2012
Revenues. Our revenues for the six months ended June 30, 2013 and 2012 were generated from the following revenue classifications and geographic regions (dollars in thousands):
Six months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
|||||||||||||||||||
Americas: |
||||||||||||||||||||||||
Recurring revenues |
$ | 596,605 | 57 | % | $ | 545,845 | 61 | % | 9 | % | 10 | % | ||||||||||||
Non-recurring revenues |
24,392 | 2 | % | 21,405 | 2 | % | 14 | % | 14 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
620,997 | 59 | % | 567,250 | 63 | % | 9 | % | 10 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
EMEA: |
||||||||||||||||||||||||
Recurring revenues |
231,924 | 22 | % | 187,143 | 21 | % | 24 | % | 25 | % | ||||||||||||||
Non-recurring revenues |
13,982 | 2 | % | 16,890 | 2 | % | (17 | %) | (17 | %) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
245,906 | 24 | % | 204,033 | 23 | % | 21 | % | 21 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Asia-Pacific: |
||||||||||||||||||||||||
Recurring revenues |
169,212 | 16 | % | 121,688 | 13 | % | 39 | % | 43 | % | ||||||||||||||
Non-recurring revenues |
9,009 | 1 | % | 7,523 | 1 | % | 20 | % | 22 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
178,221 | 17 | % | 129,211 | 14 | % | 38 | % | 42 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total: |
||||||||||||||||||||||||
Recurring revenues |
997,741 | 95 | % | 854,676 | 95 | % | 17 | % | 18 | % | ||||||||||||||
Non-recurring revenues |
47,383 | 5 | % | 45,818 | 5 | % | 3 | % | 4 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
$ | 1,045,124 | 100 | % | $ | 900,494 | 100 | % | 16 | % | 17 | % | |||||||||||||
|
|
|
|
|
|
|
|
Americas Revenues. Growth in Americas revenues was primarily due to (i) $19.5 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Dallas, Los Angeles, Miami, New York, Seattle and Washington, D.C. metro areas and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $3.4 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian reais than during the six months ended June 30, 2012, resulting in approximately $4.1 million of unfavorable foreign currency impact to our Americas revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Dallas, Rio de Janeiro, Silicon Valley, Toronto and Washington, D.C. metro areas, which are expected to open during the remainder of 2013 and 2014. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
EMEA Revenues. Our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 36% and 39%, respectively, of the regional revenues during the six months ended June 30, 2013 and 2012. Our EMEA revenue growth was due to (i) $13.0 million of additional revenue from the impact of the ancotel and Dubai IBX data center acquisitions, (ii) approximately $17.5 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, London, Paris and Zurich metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $1.5 million decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA revenues was not significant when
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compared to average exchange rates of the six months ended June 30, 2012. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Frankfurt and London metro areas, which are expected to open during the remainder of 2013. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 36% and 40%, respectively, of the regional revenues for the six months ended June 30, 2013 and 2012. Our Asia-Pacific revenue growth was due to (i) $26.4 million of additional revenue from the impact of the Asia Tone acquisition, (ii) approximately $4.2 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas and (iii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count, as discussed above. The growth in revenue was partially offset by a $883,000 decrease in revenue due to the change in the estimated period that revenue related to non-recurring installation fees is recognized, as discussed above. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the six months ended June 30, 2012, resulting in approximately $5.0 million of unfavorable foreign currency impact to our Asia-Pacific revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and additional expansions currently taking place in the Hong Kong, Osaka, Tokyo, Singapore and Sydney metro areas, which are expected to open during the remainder of 2013 and 2014. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers contracts.
Cost of Revenues. Our cost of revenues for the six months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):
Six months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
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Americas. |
$ | 290,957 | 55 | % | $ | 259,992 | 59 | % | 12 | % | 13 | % | ||||||||||||
EMEA |
131,949 | 25 | % | 105,315 | 24 | % | 25 | % | 26 | % | ||||||||||||||
Asia-Pacific |
104,055 | 20 | % | 77,080 | 17 | % | 35 | % | 40 | % | ||||||||||||||
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Total |
$ | 526,961 | 100 | % | $ | 442,387 | 100 | % | 19 | % | 21 | % | ||||||||||||
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Six months ended June 30, |
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2013 | 2012 | |||||||
Cost of revenues as a percentage of revenues: |
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Americas . |
47 | % | 46 | % | ||||
EMEA |
54 | % | 52 | % | ||||
Asia-Pacific |
58 | % | 60 | % | ||||
Total |
50 | % | 49 | % |
Americas Cost of Revenues. Our Americas cost of revenues for the six months ended June 30, 2013 and 2012 included $107.9 million and $95.3 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to (i) $3.9 million of higher costs associated with certain custom services provided to our customers, (ii) $3.6 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (862 Americas cost of revenues employees as of June 30, 2013 versus 822 as of June 30, 2012)
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and (iii) $3.0 million of higher taxes, including property taxes. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian reais than during the six months ended June 30, 2012, resulting in approximately $2.8 million of favorable foreign currency impact to our Americas cost of revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. We expect Americas cost of revenues to increase as we continue to grow our business.
EMEA Cost of Revenues. Our EMEA cost of revenues for the six months ended June 30, 2013 and 2012 included $39.6 million and $31.8 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in our EMEA cost of revenues was primarily due to (i) the impact of the ancotel and Dubai IBX data center acquisitions, which resulted in $5.5 million of additional cost of revenues for the six months ended June 30, 2013, (ii) $4.7 million of costs associated with certain custom services provided to our customers, (iii) $3.7 million of higher utility costs, (iv) $2.4 million of higher compensation expense and (v) higher professional fees to support our growth. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA cost of revenues was not significant when compared to average exchange rates of the six months ended June 30, 2012. We expect EMEA cost of revenues to increase as we continue to grow our business.
Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the six months ended June 30, 2013 and 2012 included $40.5 million and $30.9 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and the Asia Tone acquisition. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily due to (i) the impact of the Asia Tone acquisition, which resulted in $11.5 million of additional cost of revenues, and (ii) $2.9 million of higher utility costs. During the six months ended June 30, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the six months ended June 30, 2012, resulting in approximately $3.5 million of favorable foreign currency impact to our Asia-Pacific cost of revenues during the six months ended June 30, 2013 when compared to average exchange rates of the six months ended June 30, 2012. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.
Sales and Marketing Expenses. Our sales and marketing expenses for the six months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):
Six months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
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Americas. |
$ | 69,554 | 59 | % | $ | 60,835 | 65 | % | 14 | % | 15 | % | ||||||||||||
EMEA |
33,068 | 28 | % | 21,849 | 23 | % | 51 | % | 53 | % | ||||||||||||||
Asia-Pacific |
15,132 | 13 | % | 11,329 | 12 | % | 34 | % | 37 | % | ||||||||||||||
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Total |
$ | 117,754 | 100 | % | $ | 94,013 | 100 | % | 25 | % | 26 | % | ||||||||||||
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Six months ended June 30, |
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2013 | 2012 | |||||||
Sales and marketing expenses as a percentage of revenues: |
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Americas. |
11 | % | 11 | % | ||||
EMEA |
13 | % | 11 | % | ||||
Asia-Pacific |
8 | % | 9 | % | ||||
Total |
11 | % | 10 | % |
Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $8.3 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (349 Americas sales and
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marketing employees as of June 30, 2013 versus 287 as of June 30, 2012) and higher advertising and promotion costs. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the past several years, we have been investing in our Americas sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in Americas sales and marketing initiatives, we believe our Americas sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.
EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to (i) $5.1 million of additional sales and marketing expenses from the impact of the ancotel and Dubai IBX data center acquisitions and (ii) $5.0 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (172 EMEA sales and marketing employees, excluding the impact of acquisitions, as of June 30, 2013 versus 143 as of June 30, 2012). For the six months ended June 30, 2013, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the past several years, we have been investing in our EMEA sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our EMEA sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, we believe our EMEA sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.
Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $2.5 million of additional sales and marketing expenses from the impact of the Asia Tone acquisition. For the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the past several years, we have been investing in our Asia-Pacific sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Asia-Pacific sales and marketing expenses have increased. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business.
General and Administrative Expenses. Our general and administrative expenses for the six months ended June 30, 2013 and 2012 were split among the following geographic regions (dollars in thousands):
Six months ended June 30, | % change | |||||||||||||||||||||||
2013 | % | 2012 | % | Actual | Constant currency |
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Americas |
$ | 125,126 | 70 | % | $ | 118,276 | 74 | % | 6 | % | 6 | % | ||||||||||||
EMEA |
35,141 | 20 | % | 25,258 | 16 | % | 39 | % | 41 | % | ||||||||||||||
Asia-Pacific |
18,050 | 10 | % | 15,377 | 10 | % | 17 | % | 18 | % | ||||||||||||||
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Total |
$ | 178,317 | 100 | % | $ | 158,911 | 100 | % | 12 | % | 13 | % | ||||||||||||
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Six months ended June 30, |
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2013 | 2012 | |||||||
General and administrative expenses as a percentage of revenues: |
||||||||
Americas . |
20 | % | 21 | % | ||||
EMEA |
14 | % | 12 | % | ||||
Asia-Pacific |
10 | % | 12 | % | ||||
Total |
17 | % | 18 | % |
Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $6.9 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (707 Americas general and administrative employees as of June 30, 2013 versus 642 as of June 30, 2012), partially offset by $2.9 million of lower professional fees. During the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the course of the past year, we have been investing in our Americas general and administrative functions to scale this region effectively for growth, which has included additional investments into improving our back office systems. We expect our current efforts to improve our back office systems will continue over the next several years. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including this investment in our back office systems and the REIT conversion process.
EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to (i) $2.6 million of additional general and administrative expenses from the impact of the ancotel and Dubai IBX data center acquisitions, (ii) $3.0 million of higher professional fees and (iii) $2.6 million of higher compensation costs. The impact of foreign currency fluctuations to our EMEA general and administrative expenses for the six months ended June 30, 2013 was not significant when compared to average exchange rates of the six months ended June 30, 2012. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to additional general and administrative expenses from the impact of the Asia Tone acquisition and higher compensation costs. For the six months ended June 30, 2013, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the six months ended June 30, 2012. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Restructuring Charge. During the six months ended June 30, 2013, we recorded a $4.8 million reversal of the restructuring charge accrual for our excess space in the New York 2 IBX data center as a result of our decision to purchase this property and utilize the space. During the six months ended June 30, 2012, we did not record any restructuring charge.
Acquisition Costs. During the six months ended June 30, 2013, we recorded acquisition costs totaling $6.2 million primarily attributed to Americas region. During the six months ended June 30, 2012, we recorded acquisition costs totaling $2.3 million primarily attributed to the ancotel and Asia Tone acquisitions.
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Interest Income. Interest income was $1.7 million for both the six months ended June 30, 2013 and June 30, 2012. The average annualized yield for the six months ended June 30, 2013 was 0.27% versus 0.24% for the six months ended June 30, 2012. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a continued low interest rate environment and a portfolio more weighted towards short-term securities.
Interest Expense. Interest expense increased to $121.3 million for the six months ended June 30, 2013 from $99.6 million for the six months ended June 30, 2012. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013, $9.9 million of higher interest expense from various capital lease and other financing obligations to support our expansion projects and less capitalized interest expense, which was partially offset by the redemption of our 8.125% senior notes in April 2013. During the six months ended June 30, 2013 and 2012, we capitalized $5.6 million and $10.7 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our $1.5 billion senior notes offering, partially offset by the redemption of our 8.125% senior notes, which will contribute approximately $17.7 million in incremental interest expense annually. However, we may incur additional indebtedness to support our growth, resulting in higher interest expense.
Other Income (Expense). We recorded $2.3 million of other income and $2.0 million of other expense, respectively, for the six months ended June 30, 2013 and 2012, primarily due to foreign currency exchange gains and losses during the periods.
Loss on Debt Extinguishment. During the six months ended June 30, 2013, we recorded a $93.6 million