10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
OR
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¨ | 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)
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Delaware | | 77-0487526 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
One Lagoon Drive, Fourth Floor, Redwood City, California 94065
(Address of principal executive offices, including ZIP code)
(650) 598-6000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes ý No ¨ and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 ý 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):
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Large accelerated filer | ý | Accelerated filer | ¨ |
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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 ý
The number of shares outstanding of the registrant’s Common Stock as of March 31, 2016 was 69,427,936.
EQUINIX, INC.
INDEX
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
EQUINIX, INC.
Condensed Consolidated Balance Sheets
(in thousands)
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| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
| (Unaudited) |
Assets |
Current assets: | | | |
Cash and cash equivalents | $ | 633,758 |
| | $ | 2,228,838 |
|
Short-term investments | 12,353 |
| | 12,875 |
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Accounts receivable, net | 326,440 |
| | 291,964 |
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Current portion of restricted cash | 3,420 |
| | 479,417 |
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Other current assets | 236,466 |
| | 212,929 |
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Assets held for sale | 955,904 |
| | 33,257 |
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Total current assets | 2,168,341 |
| | 3,259,280 |
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Long-term investments | 3,969 |
| | 4,584 |
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Property, plant and equipment, net | 6,888,232 |
| | 5,606,436 |
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Goodwill | 3,336,968 |
| | 1,063,200 |
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Intangible assets, net | 867,536 |
| | 224,565 |
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Other assets | 230,789 |
| | 198,630 |
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Total assets | $ | 13,495,835 |
| | $ | 10,356,695 |
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Liabilities and Stockholders’ Equity |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 475,343 |
| | $ | 400,948 |
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Accrued property, plant and equipment | 124,684 |
| | 103,107 |
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Current portion of capital lease and other financing obligations | 48,325 |
| | 40,121 |
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Current portion of mortgage and loans payable | 487,065 |
| | 770,236 |
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Current portion of convertible debt | 148,282 |
| | 146,121 |
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Other current liabilities | 171,925 |
| | 192,286 |
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Liabilities held for sale | 124,571 |
| | 3,535 |
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Total current liabilities | 1,580,195 |
| | 1,656,354 |
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Capital lease and other financing obligations, less current portion | 1,552,145 |
| | 1,287,139 |
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Mortgage and loans payable, less current portion | 1,139,807 |
| | 472,769 |
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Senior notes | 3,806,167 |
| | 3,804,634 |
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Other liabilities | 598,416 |
| | 390,413 |
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Total liabilities | 8,676,730 |
| | 7,611,309 |
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Commitments and contingencies (Note 10) |
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Stockholders’ equity: | | | |
Common stock | 69 |
| | 62 |
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Additional paid-in capital | 6,973,460 |
| | 4,838,444 |
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Treasury stock | (6,635 | ) | | (7,373 | ) |
Accumulated dividends | (1,591,908 | ) | | (1,468,472 | ) |
Accumulated other comprehensive loss | (416,554 | ) | | (509,059 | ) |
Accumulated deficit | (139,327 | ) | | (108,216 | ) |
Total stockholders’ equity | 4,819,105 |
| | 2,745,386 |
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Total liabilities and stockholders’ equity | $ | 13,495,835 |
| | $ | 10,356,695 |
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See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
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| Three months ended March 31, |
| 2016 | | 2015 |
| (Unaudited) |
Revenues | $ | 844,156 |
| | $ | 643,174 |
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Costs and operating expenses: | | | |
Cost of revenues | 427,680 |
| | 298,313 |
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Sales and marketing | 106,590 |
| | 78,616 |
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General and administrative | 165,904 |
| | 113,640 |
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Acquisition costs | 36,536 |
| | 1,156 |
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Gains on asset sales | (5,242 | ) | | — |
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Total costs and operating expenses | 731,468 |
| | 491,725 |
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Income from continuing operations | 112,688 |
| | 151,449 |
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Interest income | 925 |
| | 520 |
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Interest expense | (100,863 | ) | | (68,791 | ) |
Other expense | (60,710 | ) | | (514 | ) |
Income (loss) from continuing operations before income taxes | (47,960 | ) | | 82,664 |
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Income tax benefit (expense) | 10,633 |
| | (6,212 | ) |
Net income (loss) from continuing operations | (37,327 | ) | | 76,452 |
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Net income from discontinued operations, net of tax | 6,216 |
| | — |
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Net income (loss) | $ | (31,111 | ) | | $ | 76,452 |
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Earnings (loss) per share (“EPS”): | | | |
Basic EPS from continuing operations | $ | (0.55 | ) | | $ | 1.35 |
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Basic EPS from discontinued operations | 0.09 |
| | — |
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Basic EPS | $ | (0.46 | ) | | $ | 1.35 |
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Weighted-average shares | 68,132 |
| | 56,661 |
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Diluted EPS from continuing operations | $ | (0.55 | ) | | $ | 1.34 |
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Diluted EPS from discontinued operations | 0.09 |
| | — |
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Diluted EPS | $ | (0.46 | ) | | $ | 1.34 |
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Weighted-average shares for diluted EPS | 68,132 |
| | 57,227 |
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See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
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| Three months ended March 31, |
| 2016 | | 2015 |
| (Unaudited) |
Net income (loss) | $ | (31,111 | ) | | $ | 76,452 |
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Other comprehensive income (loss), net of tax: | | | |
Foreign currency translation adjustment (“CTA”) gain (loss) | 115,899 |
| | (146,311 | ) |
Unrealized gain (loss) on available-for-sale securities | (304 | ) | | 103 |
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Unrealized gain (loss) on cash flow hedges | (6,784 | ) | | 10,556 |
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Net investment hedge CTA loss | (16,312 | ) | | — |
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Net actuarial gain on defined benefit plans | 6 |
| | 59 |
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Total other comprehensive income (loss), net of tax | 92,505 |
| | (135,593 | ) |
Comprehensive income (loss), net of tax | $ | 61,394 |
| | $ | (59,141 | ) |
See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
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| Three months ended March 31, |
| 2016 | | 2015 |
| (Unaudited) |
Cash flows from operating activities: | | | |
Net income (loss) | $ | (31,111 | ) | | $ | 76,452 |
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Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation | 172,382 |
| | 115,341 |
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Stock-based compensation | 34,061 |
| | 30,613 |
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Amortization of intangible assets | 28,152 |
| | 6,295 |
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Amortization of debt issuance costs and debt discounts | 5,508 |
| | 3,774 |
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Provision for allowance for doubtful accounts | 1,885 |
| | 1,865 |
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Gain on asset sales | (5,242 | ) | | — |
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Other items | 4,605 |
| | 3,191 |
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Changes in operating assets and liabilities: | | | |
Accounts receivable | (11,312 | ) | | (30,791 | ) |
Income taxes, net | (28,656 | ) | | (12,555 | ) |
Accounts payable and accrued expenses | (40,217 | ) | | 29,693 |
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Other assets and liabilities | (25,785 | ) | | 8,933 |
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Net cash provided by operating activities | 104,270 |
| | 232,811 |
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Cash flows from investing activities: | | | |
Purchases of investments | (10,875 | ) | | (18,446 | ) |
Sales of investments | 14,294 |
| | 6,709 |
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Maturities of investments | — |
| | 7,031 |
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Business acquisitions, net of cash acquired | (1,601,627 | ) | | (10,247 | ) |
Purchases of real estate | (16,408 | ) | | (38,282 | ) |
Purchases of other property, plant and equipment | (197,700 | ) | | (150,120 | ) |
Proceeds from sale of assets | 22,825 |
| | — |
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Changes in restricted cash | 466,704 |
| | 3,521 |
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Net cash used in investing activities | (1,322,787 | ) | | (199,834 | ) |
Cash flows from financing activities: | | | |
Proceeds from employee equity awards | 16,304 |
| | 16,384 |
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Payment of dividends | (124,836 | ) | | (96,619 | ) |
Proceeds from loans payable | 701,250 |
| | — |
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Repayment of capital lease and other financing obligations | (33,232 | ) | | (5,296 | ) |
Repayment of mortgage and loans payable | (936,353 | ) | | (13,361 | ) |
Other financing activities | 499 |
| | 98 |
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Net cash used in financing activities | (376,368 | ) | | (98,794 | ) |
Effect of foreign currency exchange rates on cash and cash equivalents | (195 | ) | | (8,391 | ) |
Net decrease in cash and cash equivalents | (1,595,080 | ) | | (74,208 | ) |
Cash and cash equivalents at beginning of period | 2,228,838 |
| | 610,917 |
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Cash and cash equivalents at end of period | $ | 633,758 |
| | $ | 536,709 |
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See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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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, 2015 has been derived from audited consolidated financial statements as of that date. The consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinix’s Form 10-K as filed with the SEC on February 26, 2016. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.
Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Equinix and its subsidiaries, including the acquisitions of Telecity Group plc (“TelecityGroup”) from January 15, 2016, Bit-isle Inc. (“Bit-isle”) from November 2, 2015 and Nimbo Technologies Inc. (“Nimbo”) from January 14, 2015. All significant intercompany accounts and transactions have been eliminated in consolidation.
Income Taxes
The Company began operating as a real estate investment trust for federal income tax purposes ("REIT") effective January 1, 2015. In May 2015, the Company received a favorable response to a private letter ruling (“PLR”) it had requested from the U.S. Internal Revenue Service (“IRS”) in connection with the Company’s conversion to a REIT for federal income tax purposes. As a result, the Company may deduct the distributions made to its shareholders from taxable income generated by the Company and its Qualified REIT Subsidiaries (“QRSs”). The Company’s dividends paid deduction generally eliminates the taxable income of the Company and its QRSs, resulting in no U.S. income tax due. However, the Taxable REIT Subsidiaries (“TRSs”) will continue to be subject to income taxes on any taxable income generated by them. In addition, the foreign operations of the Company will continue to be subject to local income taxes regardless of whether the foreign operations are operated as a QRS or a TRS.
The Company provides for income taxes during interim periods based on the estimated effective tax rate for the year. The effective tax rate is subject to change in the future due to various factors such as the operating performance of the Company, tax law changes and future business acquisitions.
The Company’s effective tax rates were 22.2% and 7.5% for the three months ended March 31, 2016 and 2015, respectively. The increase in the effective tax rate for 2016 is primarily due to non-tax deductible costs related to the TelecityGroup acquisition.
Assets Held for Sale and Discontinued Operations
Assets and liabilities to be disposed of that meet all of the criteria to be classified as held for sale as set forth in the accounting standard for impairment or disposal of long-lived assets are reported at the lower of their carrying amounts or fair values less costs to sell. Assets are not depreciated or amortized while they are classified as held for sale. A component of a reporting entity or a group of components of a reporting entity that are disposed or meet the criteria to be classified as held for sale should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The accounting guidance requires a business activity that, on acquisition, meets the criteria to be classified as held for sale be reported as a discontinued operation. Accordingly, the results of operations for the TelecityGroup data centers that will be divested have been reported as net income from discontinued operations, net of tax, from January 15, 2016, the date of the acquisition, through March 31, 2016 in the Company's condensed consolidated statement of operations. For further information on the Company’s assets held for sale and discontinued operations, see Notes 4 and 5.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). This ASU simplifies several areas of the accounting for share-based payment award transactions, including (a) income
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. This ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments ("ASU 2016-06"). This ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this ASU is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance should be applied on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year in which the amendments are effective, and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"). This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU may be applied prospectively or using a modified retrospective approach, and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. While the Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, the Company believes this standard will have a significant impact on its consolidated financial statements due, in part, to the substantial amount of operating leases it has.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments- Overall (Subtopic 825-10) ("ASU 2016-01"), which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income other than those accounted for under equity method of accounting or those that result in consolidation of the investees). The ASU also requires that an entity present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the ASU eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations ("ASU 2015-16"), to simplify accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects as a result of changes to provisional amounts, calculated as if the accounting had been completed at the acquisition
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
date. The Company adopted ASU 2015-16 in the three months ended March 31, 2016. The adoption of ASU 2015-16 did not have a significant impact on the Company's consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (“ASU 2015-07”), which permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years with early adoption permitted. A reporting entity should apply the amendment retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. The Company adopted ASU 2015-07 in the three months ended March 31, 2016. The adoption of ASU 2015-07 did not have a significant impact on the Company's consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidations (“ASU 2015-02”). This ASU requires companies to adopt a new consolidation model, specifically: (1) the ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) the ASU eliminates the presumption that a general partner should consolidate a limited partnership; (3) the ASU affects the consolidation analysis of reporting entities involved with VIEs and (4) the ASU provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU 2015-02 in the three months ended March 31, 2016. The adoption of ASU 2015-02 did not have a significant impact on the Company's consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (“ASU 2015-01”), to simplify the income statement presentation requirements by eliminating the concept of extraordinary items. ASU 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company adopted ASU 2015-01 in the three months ended March 31, 2016. The adoption of ASU 2015-01 did not have a significant impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This ASU requires companies to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which companies expect to be entitled in exchange for those goods or services. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. This ASU was originally effective for fiscal years and interim periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (“ASU 2015-14”), which amends ASU 2014-09 and defers its effective date to fiscal years and interim reporting periods beginning after December 15, 2017. ASU 2015-14 permits earlier application only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers, which clarifies the implementation guidance of principal-versus-agent considerations. The Company is currently evaluating the impact that the adoption of this standard and its amendments will have on its consolidated financial statements. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: (a) identifying performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. The ASU 2016-10 is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
2.Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the periods presented (in thousands, except per share amounts):
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| | | | | | | |
| Three months ended March 31, |
| 2016 | | 2015 |
Net income (loss): | | | |
Net income (loss) from continuing operations | $ | (37,327 | ) | | $ | 76,452 |
|
Net income from discontinued operations | 6,216 |
| | — |
|
Net income (loss) | $ | (31,111 | ) | | $ | 76,452 |
|
Weighted-average shares used to calculate basic EPS | 68,132 |
| | 56,661 |
|
Effect of dilutive securities: | | | |
Employee equity awards | — |
| | 566 |
|
Weighted-average shares used to calculate diluted EPS | 68,132 |
| | 57,227 |
|
Basic EPS: | | | |
Continuing operations | $ | (0.55 | ) | | $ | 1.35 |
|
Discontinued operations | 0.09 |
| | — |
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Basic EPS | $ | (0.46 | ) | | $ | 1.35 |
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Diluted EPS: | | | |
Continuing operations | $ | (0.55 | ) | | $ | 1.34 |
|
Discontinued operations | 0.09 |
| | — |
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Diluted EPS | $ | (0.46 | ) | | $ | 1.34 |
|
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):
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| | | | | |
| Three months ended March 31, |
| 2016 | | 2015 |
Shares reserved for conversion of 4.75% convertible subordinated notes | 1,969 |
| | 1,942 |
|
Common stock related to employee equity awards | 1,583 |
| | 211 |
|
| 3,552 |
| | 2,153 |
|
TelecityGroup Acquisition
On January 15, 2016, the Company completed the acquisition of the entire issued and to be issued share capital of Telecity Group plc (“TelecityGroup”). TelecityGroup operates data center facilities in cities across Europe. The acquisition of TelecityGroup enhances the Company's existing data center portfolio by adding new IBX metro markets in Europe including Dublin, Helsinki, Istanbul, Manchester, Milan, Sofia, Stockholm and Warsaw. As a result of the transaction, TelecityGroup has become a wholly-owned subsidiary of Equinix.
Under the terms of the acquisition, the Company acquired all outstanding shares of TelecityGroup and all vested equity awards of TelecityGroup at 572.5 pence in cash and 0.0336 new shares of Equinix common stock for a total purchase consideration of approximately £2,624,500,000 or approximately $3,743,587,000. In addition, the Company assumed $1,299,000 of vested TelecityGroup's employee equity awards as part of consideration transferred. The Company incurred acquisition costs of approximately $36,185,000 during period ended March 31, 2016 related to the TelecityGroup acquisition.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
In connection with the TelecityGroup acquisition, the Company placed £322,851,000 or approximately $475,689,000 into a restricted cash account, which was included in the current portion of restricted cash in the condensed consolidated balance sheet as of December 31, 2015. The cash was released upon completion of the acquisition.
Also, in connection with TelecityGroup acquisition, the Company entered into a bridge credit agreement with J.P. Morgan Chase Bank, N.A. (“JPMCB”) as the initial lender and as administrative agent for the lenders for a principal amount of £875,000,000 or approximately $1,289,000,000 at the exchange rate in effect on December 31, 2015 (the “Bridge Loan”). The Company had not made any borrowings under the Bridge Loan and the Bridge Loan was terminated on January 8, 2016.
The Company has initially designated the legal entities acquired in the TelecityGroup acquisition as TRSs.
Purchase Price Allocation
Under the acquisition method of accounting, the assets acquired and liabilities assumed in a business combination shall be measured at fair value at the date of the acquisition. As of the date of this quarterly report, the Company has not completed the detailed valuation analysis to derive the fair value of the following items including, but not limited to, deferred revenues; property plant and equipment; accounting for lease contracts; asset retirement obligations; favorable leasehold interests; accruals and taxes. Therefore, the allocation of the purchase price to acquired assets and liabilities is based on provisional estimates and is subject to continuing management analysis, with assistance of third party valuation advisers. As of the acquisition date, the preliminary allocation of the purchase price is as follows (in thousands):
|
| | | |
Cash and cash equivalents | $ | 73,368 |
|
Accounts receivable | 20,022 |
|
Other current assets | 39,929 |
|
Property, plant and equipment | 1,249,374 |
|
Goodwill | 2,745,913 |
|
Intangible assets | 861,817 |
|
Deferred tax assets | 568 |
|
Other assets | 4,123 |
|
Total assets acquired | 4,995,114 |
|
Accounts payable and accrued expenses | (163,490 | ) |
Accrued property, plant and equipment | (3,634 | ) |
Capital lease and other financing obligations | (263,894 | ) |
Mortgage and loans payable | (592,304 | ) |
Other current liabilities | (33,730 | ) |
Deferred tax liabilities | (156,667 | ) |
Other liabilities | (36,509 | ) |
Net assets acquired | $ | 3,744,886 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The preliminary purchase price allocation above, as of the acquisition date, includes acquired assets and liabilities that have been classified by the Company as held for sale (Note 4). The assets and liabilities held for sale also includes Company's London 2 data center in London, UK ("LD2").
The following table presents certain information on the acquired intangible assets (dollars in thousands):
|
| | | | | | | |
Intangible assets | Fair value | | Estimated useful lives (years) | | Weighted-average estimated useful lives (years) |
Customer relationships | $ | 764,550 |
| | 13.5 | | 13.5 |
Trade names | 72,033 |
| | 1.5 | | 1.5 |
Favorable leases | 25,234 |
| | 2.4 - 33.0 | | 13.6 |
The fair value of customer relationships was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the revenue. The Company applied a weighted-average discount rate of approximately 8.5%, which reflected the nature of the assets as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the TelecityGroup trade name was estimated using the relief of royalty approach. The Company applied a relief of royalty rate of 2.0% and a weighted-average discount rate of approximately 9.0%. The other acquired identifiable intangible assets were estimated by applying a relief of royalty or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.
The fair value of the property, plant and equipment was estimated by applying the income approach or cost approach. The income approach is used to estimate fair value based on the income stream, such as cash flows or earnings that an asset can be expected to generate its useful live. There are two primary methods of applying the income approach to determine the fair value assets: the discounted cash flow method and the direct capitalization method. The key assumptions include the estimated earnings, discount rate and direct capitalization rate. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The premise of the cost approach is that a market participant would pay no more for an asset than the amount that the asset could be replaced or reproduced. The key assumptions of cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age.
The Company determined the fair value of the loans payable assumed in the TelecityGroup acquisition by estimating TelecityGroup’s debt rating and reviewed market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. On January 15, 2016, the Company prepaid and terminated these loans payable. In conjunction with the repayment of the loans payable, the Company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the condensed consolidated statement of operations.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the acquisition. The goodwill is not expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the TelecityGroup acquisition, except for the goodwill associated with asset held for sale, is attributable to the Company’s EMEA region. For the three months ended March 31, 2016, the Company's results of continuing operations include TelecityGroup revenues of $84,439,000 and net loss from continuing operations of $2,821,000 for the period January 15, 2016 through March 31, 2016.
Bit-isle Acquisition
On November 2, 2015, the Company, acting through its Japanese subsidiary, completed a cash tender offer for approximately 97% of the equity instruments, including stock options, of Tokyo-based Bit-isle. The Company acquired the remaining outstanding equity instruments of Bit-isle in December 2015. The offer price was JPY 922 per share, in an all cash transaction totaling approximately $275,367,000.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
On September 30, 2015, the Company, acting through its Japanese subsidiaries as borrowers, entered into a term loan agreement (the “Bridge Term Loan Agreement”) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”). Pursuant to the Bridge Term Loan Agreement, BTMU has committed to provide a senior bridge loan facility (the “Bridge Term Loan”) in the amount of up to ¥47,500,000,000, or approximately $422,275,000 in U.S. dollars at the exchange rate in effect on March 31, 2016. Proceeds from the Bridge Term Loan were to be used exclusively for the acquisition of Bit-isle, the repayment of Bit-isle’s existing debt and transaction costs incurred in connection with the closing of the Bridge Term Loan and the acquisition of Bit-isle. For further information on the Bridge Term Loan, see Note 9 below.
The Company included Bit-isle’s results of operations from November 2, 2015 and the estimated fair value of assets acquired and liabilities assumed in its consolidated balance sheets beginning November 2, 2015.
The Company has initially designated the legal entities acquired in the Bit-isle acquisition as TRSs.
Purchase Price Allocation
Under the acquisition method of accounting, the total purchase price was allocated to Bit-isle’s net tangible and intangible assets based upon their fair value as of the Bit-isle acquisition date. Under the accounting guidance, the Company can adjust the fair value of acquired assets and liabilities assumed in the measurement period, as it obtains new information regarding the facts and circumstances that existed at the acquisition date. Based upon the purchase price and the valuation of Bit-isle, the purchase price allocation was as follows (in thousands):
|
| | | |
Cash and cash equivalent | $ | 33,198 |
|
Accounts receivable | 7,359 |
|
Other current assets | 51,038 |
|
Long-term investments | 3,806 |
|
Property, plant and equipment | 308,985 |
|
Goodwill | 95,444 |
|
Intangible assets | 111,374 |
|
Other assets | 22,981 |
|
Total assets acquired | 634,185 |
|
Accounts payable and accrued expenses | (15,028 | ) |
Accrued property, plant and equipment | (465 | ) |
Capital lease and other financing obligations | (108,833 | ) |
Mortgage and loans payable | (190,227 | ) |
Other current liabilities | (8,689 | ) |
Deferred tax liabilities | (32,192 | ) |
Other liabilities | (3,384 | ) |
Net assets acquired | $ | 275,367 |
|
The following table presents certain information on the acquired identifiable intangible assets (dollars in thousands):
|
| | | | | | | |
Intangible assets |
Fair value | |
Estimated useful lives (years) | | Weighted-average estimated useful lives (years) |
Customer relationships | $ | 105,434 |
| | 13 | | 13 |
Trade name | 3,455 |
| | 2 | | 2 |
Favorable solar contracts | 2,410 |
| | 18 | | 18 |
Other intangible assets | 75 |
| | 0.25 | | 0.25 |
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The fair value of customer relationships was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the revenue. The Company applied a weighted-average discount rate of approximately 11.0%, which reflected the nature of the assets as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the Bit-isle trade name was estimated using the relief of royalty approach. The Company applied a relief of royalty rate of 2.0% and a weighted-average discount rate of approximately 12.0%. The other acquired identifiable intangible assets were estimated by applying an income or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.
The fair value of the property, plant and equipment was estimated by applying the income approach or cost approach. The income approach is used to estimate fair value based on the income stream, such as cash flows or earnings that an asset can be expected to generate its useful live. There are two primary methods of applying the income approach to determine the fair value assets: the discounted cash flow method and the direct capitalization method. The key assumptions include the estimated earnings, discount rate and direct capitalization rate. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The premise of the cost approach is that a market participant would pay no more for an asset than the amount that the asset could be replaced or reproduced. The key assumptions of cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age.
The Company determined the fair value of the loans payable assumed in the Bit-isle Acquisition by estimating Bit-isle’s debt rating and reviewed market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. During the year ended December 31, 2015, the Company prepaid and terminated the majority of these loans payable. In conjunction with the repayment of the loans payable, the Company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the consolidated statement of operations for the year ended December 31, 2015.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the acquisition. The goodwill is not expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the Bit-isle acquisition is attributable to the Company’s Asia-Pacific region. For the three months ended March 31, 2016, the Company's results of continuing operations include Bit-isle revenues of $34,204,000 and net loss of $4,213,000.
Nimbo Acquisition
On January 14, 2015, the Company acquired all of the issued and outstanding share capital of Nimbo Technologies Inc. (“Nimbo”), a company which specializes in migrating business applications to the cloud with extensive experience moving legacy applications into a hybrid cloud architecture, and connecting legacy data centers to the cloud, for a cash payment of $10,000,000 and a contingent earn-out arrangement to be paid over two years (the “Nimbo Acquisition”). Nimbo continues to operate under the Nimbo name. The Nimbo Acquisition was accounted for using the acquisition method. As a result of the Nimbo Acquisition, the Company recorded goodwill of $17,192,000, which represents the excess of the total purchase price over the fair value of the assets acquired and liabilities assumed. The Company recorded the contingent earn-out arrangement at its estimated fair value. The results of operations for Nimbo are not significant to the Company; therefore, the Company does not present its purchase price allocation or pro forma combined results of operations. In addition, any prospective changes in the Company’s earn-out estimates are not expected to have a material effect on the Company’s consolidated statement of operations.
Unaudited Pro Forma Combined Consolidated Financial Information
The following unaudited pro forma combined consolidated financial information has been prepared by the Company using the acquisition method of accounting to give effect to the TelecityGroup and Bit-isle acquisitions as though the acquisitions occurred on January 1, 2015. The Company completed the TelecityGroup acquisition on January 15, 2016. The operating results of TelecityGroup for the period January 15, 2016 through March 31, 2016 were included in the condensed consolidated statement of operations for the period ended March 31, 2016. The pro forma effect for the period ended March 31, 2016 was insignificant. The unaudited pro forma combined consolidated financial information reflects certain adjustments, such as additional depreciation, amortization and interest expense on assets and liabilities acquired.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the acquisitions occurred on the above dates, nor is it necessarily indicative of the future results of operations of the combined company.
The following table sets forth the unaudited pro forma consolidated combined results of operations for the three months ended March 31, 2015 (in thousands):
|
| | | |
| Three months ended March 31, |
| 2015 |
Revenues | $ | 778,536 |
|
Net income from continuing operations | 50,960 |
|
Basic EPS | 0.80 |
|
Diluted EPS | 0.80 |
|
4. Assets Held for Sale
In order to obtain the approval of the European Commission for the acquisition of TelecityGroup, the Company and TelecityGroup have agreed to divest certain data centers, including the Company’s LD2 and certain data centers of TelecityGroup in the United Kingdom, Netherlands and Germany. There is no definitive agreement with any buyer or buyers and any such agreement will be subject to the approval of the European Commission. There can be no assurance as to the timing or amount of proceeds to be received in connection with the sale of all or any part of data centers to be divested in connection with the TelecityGroup acquisition. The assets and liabilities of LD2, which are included within the EMEA operating segment, were classified as held for sale in the fourth quarter of 2015 and, therefore, the corresponding depreciation and amortization expense was ceased at that time. This anticipated divestiture is not presented as discontinued operations in the consolidated statements of operations, because it does not represent a strategic shift in the Company's business, as the Company will continue operating similar businesses after the acquisition. During the three months ended March 31, 2016 and 2015, LD2 had revenue of $3,166,000 and $4,682,000, respectively, and net income recognized during these periods was insignificant.
During the fourth quarter of 2015, the Company entered into an agreement to sell a parcel of land in San Jose, California and reported the San Jose land parcel as asset held for sale in the accompanying consolidated balance sheet as of December 31, 2015. The sale was completed in February 2016.
The acquisition of TelecityGroup closed on January 15, 2016. Accordingly, the assets and liabilities of the TelecityGroup data centers that will be divested were included in assets and liabilities held for sale in the condensed consolidated balance sheet as of March 31, 2016. The results of operations for the TelecityGroup data centers that will be divested were classified as discontinued operations from January 15, 2016, the date the acquisition closed, through March 31, 2016.
When an asset is classified as held for sale, the asset's book value is evaluated and adjusted to the lower of its carrying amount or fair value less cost to sell. The determination of fair value for assets is dependent upon, among other factors, the potential sales transaction, composition of assets in the disposal group, the comparability of the disposal group to market transactions and negotiations with third party purchasers, etc. Such factors impact the range of potential fair values and the selection of the best estimates. As of the date of this quarterly report, the fair value of assets acquired as a result of the acquisition of TelecityGroup has not been finalized yet. The assets held for sale is based on the estimated selling price less the estimated cost to sell the assets. As of March 31, 2016 and December 31, 2015, the Company determined that assets held for sale had not been impaired.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table summarizes assets and liabilities that were classified in assets and liabilities held for sale as of March 31, 2016 and December 31, 2015 (in thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
Accounts receivable | $ | 9,011 |
| | $ | 2,222 |
|
Other current assets | 3,178 |
| | 408 |
|
Property, plant and equipment | 216,364 |
| | 23,533 |
|
Goodwill | 518,766 |
| | 5,000 |
|
Intangible assets | 206,644 |
| | 784 |
|
Other assets | 1,941 |
| | 1,310 |
|
Total assets held for sale | 955,904 |
| | $ | 33,257 |
|
| | | |
Accounts payable, accrued expenses and estimated costs to sell | $ | (56,367 | ) | | $ | (654 | ) |
Accrued property, plant and equipment | — |
| | (816 | ) |
Current portion of capital lease and other financing obligation | (93 | ) | | — |
|
Other current liabilities | (4,048 | ) | | (435 | ) |
Capital lease and other financing obligations, less current portion | (56,896 | ) | | — |
|
Other liabilities | (7,167 | ) | | (1,630 | ) |
Total liabilities held for sale | $ | (124,571 | ) | | $ | (3,535 | ) |
| |
5. | Discontinued Operations |
In order to obtain the approval of the European Commission for the acquisition of TelecityGroup, the Company and TelecityGroup have agreed to divest certain data centers, including the Company’s LD2 and certain data centers of TelecityGroup in the United Kingdom, Netherlands and Germany. Accounting guidance requires a business activity that, on acquisition, meets the criteria to be classified as held for sale be reported as a discontinued operation. Accordingly, the results of operations for the TelecityGroup data centers that will be divested have been reported as net income from discontinued operations, net of tax, from January 15, 2016, the date of the acquisition, through March 31, 2016 in the Company's condensed consolidated statement of operations.
The following table presents the financial results of the discontinued operations:
|
| | | |
| Three months ended March 31, 2016 |
Revenues | $ | 20,581 |
|
Costs and operating expenses: | |
Cost of revenues | 11,610 |
|
Sales and marketing | 217 |
|
General and administrative | 383 |
|
Total costs and operating expenses | 12,210 |
|
Income from operations of discontinued operations | 8,371 |
|
Interest and other, net | (469 | ) |
Income from discontinued operations before income taxes | 7,902 |
|
Income tax expense | (1,686 | ) |
Income from discontinued operations, net of income taxes | $ | 6,216 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Net cash used in operating activities for discontinued operations was $11,769,000 and net cash used in investing activities for discontinued operations was $23,428,000 for the period ended March 31, 2016.
No gain or loss on the disposition of the assets and liabilities of these data centers has been recognized in the condensed consolidated financial statements.
| |
6. | Derivatives and Hedging Activities |
Derivatives Designated as Hedging Instruments
Net Investment Hedges. The Company is exposed to the impact of foreign exchange rate fluctuations in investments in its wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. dollar. In order to mitigate the volatility in foreign currency exchange rates, the Company has entered into various foreign currency loans which are designated as hedges against the Company's net investment in foreign subsidiaries. In April 2015, the Company entered into a foreign currency term loan ("Term Loan A") and designated 100% of the Term Loan A to hedge its net investments in its wholly-owned foreign subsidiaries that are denominated in the same foreign currencies as the term loan. In December 2015, the Company terminated hedging its net investment in subsidiaries that are denominated in Swiss Francs. In January 2016, the Company borrowed the full amount of the $250,000,000 and £300,000,000 seven year term loan commitments made available to it under the second amendment to the Company's Senior Credit Facility ("Term Loan B"). The Company designated the portion of Term Loan B that is denominated in the British pound to hedge the net investments in its wholly-owned foreign subsidiaries. In March 2016, the Company used foreign exchange forward contracts to hedge against the effect of foreign exchange rate fluctuations on a portion of its net investment in the EMEA operations. The total principal amount of foreign currency loans outstanding at March 31, 2016 and December 31, 2015, which were designated as net investment hedges, was $844,278,000 and $411,881,000, respectively. For a net investment hedge, all changes in the fair value of the hedging instrument designated as a net investment hedge, except the ineffective portion, are recorded as a component of other comprehensive income in the condensed consolidated balance sheet. The Company recorded net foreign exchange loss of $16,312,000 in other comprehensive income and loss for the three months ended March 31, 2016. The Company recorded no ineffectiveness from its net investment hedges for the three months ended March 31, 2016.
Cash Flow Hedges. The Company hedges its exposure to foreign currency exchange rate fluctuations for forecasted revenues and expenses in its EMEA region in order to help manage the Company’s exposure to foreign currency exchange rate fluctuations between the U.S. dollar and the British Pound, Euro and Swiss Franc. The foreign currency forward and option contracts that the Company uses to hedge this exposure are designated as cash flow hedges under the accounting standard for derivatives and hedging.
Effective January 1, 2015, the Company entered into intercompany hedging instruments (“intercompany derivatives”) with a wholly-owned subsidiary of the Company and simultaneously entered into derivative contracts with unrelated parties to hedge certain forecasted revenues and expenses denominated in currencies other than the U.S. dollar.
The following disclosure is prepared on a consolidated basis. Assets and liabilities resulting from intercompany derivatives have been eliminated in consolidation.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
As of March 31, 2016, the Company’s cash flow hedges had maturities dates ranging from April 2016 to December 2017 as follows (in thousands):
|
| | | | | | | | | | | |
| Notional Amount | | Fair Value (1) | | Accumulated other comprehensive income (loss) (2) (3) |
Derivative assets | $ | 282,657 |
| | $ | 11,965 |
| | $ | 27,270 |
|
Derivative liabilities | 236,860 |
| | (6,762 | ) | | (21,445 | ) |
| $ | 519,517 |
| | $ | 5,203 |
| | $ | 5,825 |
|
| |
(1) | All derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss). |
| |
(3) | The Company recorded a net gain of $5,951 within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expenses as they mature in the next 12 months. |
As of December 31, 2015, the Company’s cash flow hedges had maturities dates ranging from January 2016 to December 2017 as follows (in thousands):
|
| | | | | | | | | | | |
| Notional Amount | | Fair Value (1) | | Accumulated other comprehensive income (loss) (2)(3) |
Derivative assets | $ | 367,330 |
| | $ | 16,027 |
| | $ | 34,578 |
|
Derivative liabilities | 47,447 |
| | (813 | ) | | (19,709 | ) |
| $ | 414,777 |
| | $ | 15,214 |
| | $ | 14,869 |
|
| |
(1) | All derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss). |
| |
(3) | The Company recorded a net gain of $12,940 within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expense as they mature over the next 12 months. |
During the three months ended March 31, 2016 and 2015, the ineffective and excluded portions of cash flow hedges recognized in other income (expense) were not significant. During the three months ended March 31, 2016, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was $6,446,000 and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $3,831,000. During the three months ended March 31, 2015, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was $8,078,000 and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses were not significant.
Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. The Company is deemed to have foreign currency forward contracts embedded in certain of the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved. These embedded derivatives are separated from their host contracts and carried on the Company’s balance sheet at their fair value. The majority of these embedded derivatives arise as a result of the Company’s foreign subsidiaries pricing their customer contracts in the U.S. dollar. Gains and losses on these embedded derivatives are included within revenues in the Company’s condensed consolidated statements of operations. During the three months ended March 31, 2016, the loss associated with these embedded derivatives were $6,559,000 and during the three months ended March 31,2015, the gains (losses) associated with these embedded derivatives were insignificant.
Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved (“economic hedges of embedded derivatives”). Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
upon settlement date. 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 months ended March 31, 2016 and 2015. During the three months ended March 31, 2016, the gains associated with these contracts were $3,690,000 and during the three months ended March 31, 2015, the gains (losses) from these contracts were insignificant.
Foreign Currency Forward and Option Contracts. The Company also uses foreign currency forward and option contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of its foreign currency-denominated assets and liabilities change. Gains and losses on these contracts are included in other income (expense), net, along with foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward and contracts. The Company entered into various foreign currency forward and option contracts during the three months ended March 31, 2016 and 2015. During the three months ended March 31, 2016 and 2015, the company recognized a net loss of $7,593,000 and a net gain of $10,257,000, respectively, associated with these contracts.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Offsetting Derivative Assets and Liabilities
The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of March 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Gross Amounts | | Gross amounts offset in the balance sheet | | Net amounts (1) | | Gross amounts not offset in the balance sheet (2) | | Net |
Assets: | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | |
Cash flow hedges | | | | | | | | | |
Foreign currency forward contracts | $ | 11,965 |
| | $ | — |
| | $ | 11,965 |
| | $ | (4,984 | ) | | $ | 6,981 |
|
Net Investment Hedges | | | | | | | | | |
Foreign currency forward contracts | — |
| | — |
| | — |
| | — |
| | — |
|
| 11,965 |
| | — |
| | 11,965 |
| | (4,984 | ) | | 6,981 |
|
Not designated as hedging instruments: |
| |
| |
| |
| |
|
Embedded derivatives | 5,871 |
| | — |
| | 5,871 |
| | — |
| | 5,871 |
|
Economic hedges of embedded derivatives | 2,035 |
| | — |
| | 2,035 |
| | (4 | ) | | 2,031 |
|
Foreign currency forward and option contracts | 3,139 |
| | — |
| | 3,139 |
| | (50 | ) | | 3,089 |
|
| 11,045 |
| | — |
| | 11,045 |
| | (54 | ) | | 10,991 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (4,850 | ) | | (4,850 | ) |
| $ | 23,010 |
| | $ | — |
| | $ | 23,010 |
| | $ | (9,888 | ) | | $ | 13,122 |
|
Liabilities: | | | | | | | | | |
Designated as hedging instruments | | | | | | | | | |
Cash flow hedges | | | | | | | | | |
Foreign currency forward contracts | $ | 6,762 |
| | $ | — |
| | $ | 6,762 |
| | $ | (4,984 | ) | | $ | 1,778 |
|
Net Investment Hedges | | | | | | | | | |
Foreign currency forward contracts | 3,563 |
| | — |
| | 3,563 |
| | — |
| | 3,563 |
|
| 10,325 |
| | — |
| | 10,325 |
| | (4,984 | ) | | 5,341 |
|
Not designated as hedging instruments: |
| |
| |
| |
| |
|
Embedded derivatives | 4,978 |
| | — |
| | 4,978 |
| | — |
| | 4,978 |
|
Economic hedges of embedded derivatives | 32 |
| | — |
| | 32 |
| | (4 | ) | | 28 |
|
Foreign currency forward and option contracts | 4,107 |
| | — |
| | 4,107 |
| | (50 | ) | | 4,057 |
|
| 9,117 |
| | — |
| | 9,117 |
| | (54 | ) | | 9,063 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (4,850 | ) | | (4,850 | ) |
| $ | 19,442 |
| | $ | — |
| | $ | 19,442 |
| | $ | (9,888 | ) | | $ | 9,554 |
|
| |
(1) | As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default. |
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of December 31, 2015 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Gross Amounts | | Gross amounts offset in the balance sheet | | Net balance sheet amounts (1) | | Gross amounts not offset in the balance sheet (2) | | Net |
Assets: | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | |
Foreign currency forward and option contracts | $ | 16,027 |
| | $ | — |
| | $ | 16,027 |
| | $ | (813 | ) | | $ | 15,214 |
|
Not designated as hedging instruments: | | | | | | | | | |
Embedded derivatives | 8,926 |
| | — |
| | 8,926 |
| | — |
| | 8,926 |
|
Economic hedges of embedded derivatives | 744 |
| | — |
| | 744 |
| | — |
| | 744 |
|
Foreign currency forward contracts | 43,203 |
| | — |
| | 43,203 |
| | (34,577 | ) | | 8,626 |
|
| 52,873 |
| | — |
| | 52,873 |
| | (34,577 | ) | | 18,296 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (9,512 | ) | | (9,512 | ) |
| $ | 68,900 |
| | $ | — |
| | $ | 68,900 |
| | $ | (44,902 | ) | | $ | 23,998 |
|
Liabilities: | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | |
Foreign currency forward contracts | $ | 813 |
| | $ | — |
| | $ | 813 |
| | $ | (813 | ) | | $ | — |
|
| 813 |
| | — |
| | 813 |
| | (813 | ) | | — |
|
Not designated as hedging instruments: | | | | | | | | | |
Embedded derivatives | 1,772 |
| | — |
| | 1,772 |
| | — |
| | 1,772 |
|
Economic hedges of embedded derivatives | 417 |
| | — |
| | 417 |
| | — |
| | 417 |
|
Foreign currency forward and option contracts | 76,923 |
| | — |
| | 76,923 |
| | (34,577 | ) | | 42,346 |
|
| 79,112 |
| | — |
| | 79,112 |
| | (34,577 | ) | | 44,535 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (9,512 | ) | | (9,512 | ) |
| $ | 79,925 |
| | $ | — |
| | $ | 79,925 |
| | $ | (44,902 | ) | | $ | 35,023 |
|
| |
(1) | As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default. |
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| |
7. | Fair Value Measurements |
The Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2016 were as follows (in thousands):
|
| | | | | | | | | | | |
| Fair value at March 31, 2016 | | Fair value measurement using |
| Level 1 | | Level 2 |
Assets: | | | | | |
Cash | $ | 396,449 |
| | $ | 396,449 |
| | $ | — |
|
Money market and deposit accounts | 234,119 |
| | 234,119 |
| | — |
|
Publicly traded equity securities | 3,766 |
| | 3,766 |
| | — |
|
Certificates of deposit | 15,747 |
| | — |
| | 15,747 |
|
Derivative instruments (1) | 23,010 |
| | — |
| | 23,010 |
|
| $ | 673,091 |
| | $ | 634,334 |
| | $ | 38,757 |
|
Liabilities: | | | | | |
Derivative instruments (1) | $ | 19,442 |
| | $ | — |
| | $ | 19,442 |
|
| $ | 19,442 |
| | $ | — |
| | $ | 19,442 |
|
| |
(1) | Includes both foreign currency embedded derivatives and foreign currency forward and option contracts. Amounts are included within other current assets, other assets, others current liabilities and other liabilities in the Company’s accompanying condensed consolidated balance sheet. |
The Company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 were as follows (in thousands):
|
| | | | | | | | | | | |
| Fair value at December 31, 2015 | | Fair value measurement using |
| Level 1 | | Level 2 |
Assets: | | | | | |
Cash | $ | 1,139,554 |
| | $ | 1,139,554 |
| | $ | — |
|
Money market and deposit accounts | 1,089,284 |
| | 1,089,284 |
| | — |
|
Publicly traded equity securities | 3,353 |
| | 3,353 |
| | — |
|
Certificates of deposit | 14,106 |
| | — |
| | 14,106 |
|
Derivative instruments (1) | 68,900 |
| | — |
| | 68,900 |
|
| $ | 2,315,197 |
| | $ | 2,232,191 |
| | $ | 83,006 |
|
Liabilities: | | | | | |
Derivative instruments (1) | $ | 79,925 |
| | $ | — |
| | $ | 79,925 |
|
| $ | 79,925 |
| | $ | — |
| | $ | 79,925 |
|
| |
(1) | Includes both foreign currency embedded derivatives and foreign currency forward and option contracts. Amounts are included within other current assets, other assets, other current liabilities and other liabilities in the Company’s accompanying condensed consolidated balance sheet. |
The Company did not have any significant Level 3 financial assets or financial liabilities as of March 31, 2016 and December 31, 2015.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Capital Lease and Other Financing Obligations
Tokyo 5 ("TY5") Equipment Leases
In February 2016, the Company entered into a lease agreement for certain equipment in TY5 data center in Tokyo metro area. The lease was accounted for as a capital lease. Monthly payments under the equipment lease will be made through February 2032 at an effective interest rate of 6.33%. The total obligation under the equipment lease was approximately ¥3,074,947,000, or $27,335,000 in U.S. dollars at the exchange rate in effect as of March 31, 2016.
Maturities of Capital Lease and Other Financing Obligations
The Company’s capital lease and other financing obligations are summarized as follows (in thousands):
|
| | | | | | | | | | | |
| Capital lease obligations | | Other financing obligations (1) | | Total |
2016 (9 months remaining) | $ | 58,850 |
| | $ | 64,147 |
| | $ | 122,997 |
|
2017 | 79,509 |
| | 86,216 |
| | 165,725 |
|
2018 | 80,032 |
| | 82,472 |
| | 162,504 |
|
2019 | 80,857 |
| | 77,091 |
| | 157,948 |
|
2020 | 80,878 |
| | 74,617 |
| | 155,495 |
|
Thereafter | 961,236 |
| | 794,225 |
| | 1,755,461 |
|
Total minimum lease payments | 1,341,362 |
| | 1,178,768 |
| | 2,520,130 |
|
Plus amount representing residual property value | 368 |
| | 539,509 |
| | 539,877 |
|
Less amount representing interest | (629,395 | ) | | (830,142 | ) | | (1,459,537 | ) |
Present value of net minimum lease payments | 712,335 |
| | 888,135 |
| | 1,600,470 |
|
Less current portion | (23,269 | ) | | (25,056 | ) | | (48,325 | ) |
| $ | 689,066 |
| | $ | 863,079 |
| | $ | 1,552,145 |
|
(1) Other financing obligations are primarily build-to-suit lease obligations.
Other financing obligations for data centers to be divested in connection with the Company's acquisition of TelecityGroup are included in liabilities held for sale in the condensed consolidated balance sheet at March 31, 2016 and are not included in the summary of the Company's capital lease and other financing obligations above. Total minimum lease payments under those obligations totaled $56,989,000 at March 31, 2016.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Mortgage and Loans Payable
The Company’s mortgage and loans payable consisted of the following (in thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
Term loans | $ | 1,139,986 |
| | $ | 456,740 |
|
Bridge term loan | 422,275 |
| | 386,547 |
|
Revolving credit facility borrowings | — |
| | 325,622 |
|
Brazil financings | 28,873 |
| | 27,113 |
|
Mortgage payable and other loans payable | 49,568 |
| | 47,677 |
|
| 1,640,702 |
| | 1,243,699 |
|
Less amount representing debt discount and debt issuance cost | (15,895 | ) | | (2,681 | ) |
Plus amount representing mortgage premium | 2,065 |
| | 1,987 |
|
| 1,626,872 |
| | 1,243,005 |
|
Less current portion | (487,065 | ) | | (770,236 | ) |
| $ | 1,139,807 |
| | $ | 472,769 |
|
On January 8, 2016, the Company borrowed the full amount of the $250,000,000 and £300,000,000 seven year term loan commitments made available to it under the second amendment to the Company's Senior Credit Facility. The $250,000,000 seven year term loan bears interest at 4.0000% per annum and will be repaid in quarterly installments of $625,000 commencing on June 30, 2016 with the remaining $233,125,000 due on January 8, 2023. The £300,000,000 seven year term loan bears interest at 4.5000% per annum and will be repaid in quarterly installments of £750,000 commencing on June 30, 2016 with the remaining £279,750,000 due on January 8, 2023. The £300,000,000 outstanding term loan was approximately $431,310,000 in U.S. dollars at the exchange rate in effect as of March 31, 2016.
On January 15, 2016, the Company prepaid and terminated loans payable of TelecityGroup. In conjunction with the repayment of the loans payable, the company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the condensed consolidated statement of operations. See Note 3 for additional information.
In February 2016, the Company borrowed the remaining ¥1,040,000,000, or approximately $9,246,000 in U.S. dollars at the exchange rate in effect as of March 31, 2016, available under its JPY bridge term loan agreement.
During the three months ended March 31, 2016, the Company repaid $325,622,000 of borrowings under its revolving credit facility. No borrowings were outstanding under the revolving credit facility as of March 31, 2016.
Convertible Debt
The Company’s convertible debt consisted of the following (in thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
4.75% convertible subordinated notes | $ | 150,082 |
| | $ | 150,082 |
|
Less amount representing debt discount and debt issuance cost | (1,800 | ) | | (3,961 | ) |
| $ | 148,282 |
| | $ | 146,121 |
|
4.75% Convertible Subordinated Notes
Holders of the 4.75% convertible subordinated notes were eligible to convert their notes during the quarter ended March 31, 2016 and are eligible to convert their notes during the remaining term of the notes, since the stock price condition conversion
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
clause was met during the applicable periods. As of March 31, 2016, 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 1,972,258 shares of the Company’s common stock.
The 4.75% convertible subordinated notes are scheduled to mature on June 15, 2016. Upon maturity (and assuming that no conversion occurs prior to such maturity), the Company will be obligated to settle any outstanding principal amount of the notes and accrued interest in cash. On March 15, 2016, the Company notified convertible bond holders it has elected to deliver shares (and cash in lieu of any fractional shares) in respect of any conversion notices on or after March 15, 2016.
To minimize the impact of potential dilution upon conversion of the 4.75% convertible subordinated notes, the Company entered into capped call transactions (the “Capped Call”) separate from the issuance of the 4.75% convertible subordinated notes and paid a premium of $49,664,000 for the Capped Call in 2009. The Capped Call covers a total of approximately 4,432,638 shares of the Company’s common stock, subject to adjustment. Under the Capped Call, the Company effectively raised the conversion price of the 4.75% convertible subordinated notes from $84.32 to $114.82.
The Company amends the Capped Call agreement each time a special distribution or quarterly dividend is declared to adjust the effective conversion price of the 4.75% Convertible Subordinated Notes. Pursuant to the declaration of the quarterly dividend in February 2016, the Company further amended the Capped Call agreement to adjust the effective conversion price of the 4.75% convertible subordinated notes from $76.10 to $103.54 per share of common stock. Depending upon the Company’s stock price at the time the 4.75% convertible subordinated notes are redeemed, the settlement of the Capped Call will result in a delivery of up to 1,301,644 shares of the Company’s common stock to the Company; however, the Company will receive no benefit from the Capped Call if the Company’s stock price is $76.10 or lower at the time of conversion and will receive less shares than the 1,301,644 share maximum as described above for share prices in excess of $103.54 at the time of conversion than it would have received at a share price of $103.54 (the Company’s benefit from the Capped Call is capped at $103.54 and the benefit received begins to decrease above this price).
Senior Notes
The Company’s senior notes consisted of the following as of (in thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
5.375% Senior Notes due 2023 | $ | 1,000,000 |
| | $ | 1,000,000 |
|
5.375% Senior Notes due 2022 | 750,000 |
| | 750,000 |
|
4.875% Senior Notes due 2020 | 500,000 |
| | 500,000 |
|
5.75% Senior Notes due 2025 | 500,000 |
| | 500,000 |
|
5.875% Senior Notes due 2026 | 1,100,000 |
| | 1,100,000 |
|
| 3,850,000 |
| | 3,850,000 |
|
Less amount representing debt issuance cost | (43,833 | ) | | (45,366 | ) |
| $ | 3,806,167 |
| | $ | 3,804,634 |
|
Maturities of Debt Facilities
The following table sets forth maturities of the Company’s debt, including mortgage and loans payable, convertible debt and senior notes and excluding debt discounts and premium as of March 31, 2016 (in thousands):
|
| | | |
Year ending: | |
2016 (9 months remaining) | $ | 624,264 |
|
2017 | 60,136 |
|
2018 | 56,255 |
|
2019 | 356,803 |
|
2020 | 510,232 |
|
Thereafter | 4,035,159 |
|
| $ | 5,642,849 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Fair Value of Debt Facilities
The following table sets forth the estimated fair values of the Company’s mortgage and loans payable, senior notes and convertible debt, including current maturities, as of (in thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
Mortgage and loans payable | $ | 1,624,926 |
| | $ | 916,602 |
|
Convertible debt | 152,896 |
| | 151,997 |
|
Senior notes | 4,024,875 |
| | 3,954,000 |
|
Revolving credit line | — |
| | 325,617 |
|
The Company has determined that the inputs used to value its debt facilities fall 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 March 31, |
| 2016 | | 2015 |
Interest expense | $ | 100,863 |
| | $ | 68,791 |
|
Interest capitalized | 2,286 |
| | 3,203 |
|
Interest charges incurred | $ | 103,149 |
| | $ | 71,994 |
|
| |
10. | Commitments and Contingencies |
Purchase Commitments
Primarily as a result of the Company’s various IBX expansion projects, as of March 31, 2016, the Company was contractually committed for $410.7 million of unaccrued capital expenditures, primarily for IBX infrastructure 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 March 31, 2016, such as commitments to purchase power in select locations through the remainder of 2016 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2016 and thereafter. Such other miscellaneous purchase commitments totaled $442.4 million as of March 31, 2016.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
|
| | | | | | | | | | | |
| Balance as of December 31, 2015 | | Net Change | | Balance as of March 31, 2016 |
Foreign currency translation adjustment (“CTA”) gain (loss) | $ | (523,709 | ) | | $ | 115,899 |
| | $ | (407,810 | ) |
Unrealized gain (loss) on cash flow hedges | 11,153 |
| | (6,784 | ) | | 4,369 |
|
Unrealized loss on available-for-sale securities | (139 | ) | | (304 | ) | | (443 | ) |
Net investment hedge CTA gain (loss) | 4,484 |
| | (16,312 | ) | | (11,828 | ) |
Net actuarial gain (loss) on defined benefit plans | (848 | ) | | 6 |
| | (842 | ) |
| $ | (509,059 | ) | | $ | 92,505 |
| | $ | (416,554 | ) |
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Changes in foreign currency exchange rates can have a significant impact to the Company’s consolidated balance sheets (as evidenced above in the Company’s foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies generally translate into more U.S. dollars when the U.S. dollar weakens or less U.S. dollars when the U.S. dollar strengthens. As of March 31, 2016, the U.S. dollar was generally weaker relative to certain of the currencies of the foreign countries in which the Company operates. This overall weakening of the U.S. dollar had an overall favorable impact on the Company’s consolidated financial position because the foreign denominations translated into more U.S. dollars as evidenced by an increase in foreign currency translation gain for the three months ended March 31, 2016 as reflected in the above table. In future periods, the volatility of the U.S. dollar as compared to the other currencies in which the Company operates could have a significant impact on its consolidated financial position and results of operations including the amount of revenue that the Company reports in future periods.
Dividends
On February 18, 2016, the Company declared a quarterly cash dividend of $1.75 per share, with a record date of March 9, 2016 and a payment date of March 23, 2016. The Company paid a total of $121,494,000 on March 23, 2016 for the first quarter cash dividend. In addition, the Company accrued an additional $1,366,000 in dividends payable for the restricted stock units that have not yet vested.
Stock-Based Compensation
In the first quarter of 2016, the Compensation Committee and the Stock Award Committee of the Company’s Board of Directors approved the issuance of an aggregate of 526,988 shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan, as part of the Company’s annual refresh program. These equity awards are subject to vesting provisions and have a weighted-average grant date fair value of $290.46 and a weighted-average requisite service period of 3.48 years. The valuation of restricted stock units with only a service condition or a service and performance condition requires no significant assumptions as the fair value for these types of equity awards is based solely on the fair value of the Company’s stock price on the date of grant. The Company used revenue and adjusted funds from operations (“AFFO”) as the performance measurements in the restricted stock units with both service and performance conditions that were granted in February 2016, whereby revenue and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) were used as the performance measurements in prior years’ grants.
The Company uses a Monte Carlo simulation option-pricing model to determine the fair value of restricted stock units with a service and market condition. There were no significant changes in the assumptions used to determine the fair value of restricted stock units with a service and market condition that were granted in 2016 compared to the prior year.
The following table presents, by operating expense category, the Company’s stock-based compensation expense recognized in the Company’s condensed consolidated statement of operations (in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2016 | | 2015 |
Cost of revenues | $ | 2,997 |
| | $ | 2,306 |
|
Sales and marketing | 9,771 |
| | 8,711 |
|
General and administrative | 21,747 |
| | 19,596 |
|
| $ | 34,515 |
| | $ | 30,613 |
|
While the Company has a single line of business, which is the design, build-out and operation of IBX data centers, it has determined that it has three reportable segments comprised of its Americas, EMEA and Asia-Pacific geographic regions. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources based on the Company’s revenue and adjusted EBITDA performance both on a consolidated basis and based on these three reportable segments. The Company defines adjusted EBITDA as income from operations plus depreciation, amortization, accretion, stock-
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
based compensation expense, restructuring charges, impairment charges, acquisition costs and gains on asset sales as presented below (in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2016 | | 2015 |
Adjusted EBITDA: | | | |
Americas | $ | 184,460 |
| | $ | 172,734 |
|
EMEA | 111,489 |
| | 76,031 |
|
Asia-Pacific | 84,701 |
| | 56,983 |
|
Total adjusted EBITDA | 380,650 |
| | 305,748 |
|
Depreciation, amortization and accretion expense | (202,153 | ) | | (122,530 | ) |
Stock-based compensation expense | (34,515 | ) | | (30,613 | ) |
Acquisition costs | (36,536 | ) | | (1,156 | ) |
Gains on asset sales | 5,242 |
| | — |
|
Income from operations | $ | 112,688 |
| | $ | 151,449 |
|
The Company also provides the following additional segment disclosures (in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2016 | | 2015 |
Total revenues: | | | |
Americas | $ | 404,394 |
| | $ | 363,969 |
|
EMEA | 267,856 |
| | 164,623 |
|
Asia-Pacific | 171,906 |
| | 114,582 |
|
| $ | 844,156 |
| | $ | 643,174 |
|
Total depreciation and amortization: | | | |
Americas | $ | 76,259 |
| | $ | 66,727 |
|
EMEA | 76,050 |
| | 26,507 |
|
Asia-Pacific | 48,225 |
| | 28,402 |
|
| $ | 200,534 |
| | $ | 121,636 |
|
Capital expenditures: | | | |
Americas | $ | 83,499 |
| | $ | 82,726 |
|
EMEA | 57,273 |
| | 27,556 |
|
Asia-Pacific | 56,928 |
| | 39,838 |
|
| $ | 197,700 |
| | $ | 150,120 |
|
The Company’s long-lived assets are located in the following geographic areas as of (in thousands):
|
| | | | | | | |
| March 31, 2016 | | December 31, 2015 |
Americas | $ | 3,074,737 |
| | $ | 3,025,450 |
|
EMEA | 2,287,091 |
| | 1,157,304 |
|
Asia-Pacific | 1,526,404 |
| | 1,423,682 |
|
| $ | 6,888,232 |
| | $ | 5,606,436 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Revenue information on a services basis is as follows (in thousands):
|
| | | | | | | |
| Three months ended March 31, |
| 2016 | | 2015 |
Colocation | $ | 619,893 |
| | $ | 481,545 |
|
Interconnection | 127,205 |
| | 101,658 |
|
Managed infrastructure | 44,736 |
| | 23,855 |
|
Other | 5,260 |
| | 2,599 |
|
Recurring revenues | 797,094 |
| | 609,657 |
|
Non-recurring revenues | 47,062 |
| | 33,517 |
|
| $ | 844,156 |
| | $ | 643,174 |
|
No single customer accounted for 10% or greater of the Company’s revenues for the three months ended March 31, 2016 and 2015. No single customer accounted for 10% or greater of the Company’s gross accounts receivable as of March 31, 2016 and December 31, 2015.
On May 4, 2016, the Company declared a quarterly cash dividend of $1.75 per share, which is payable on June 15, 2016 to the Company’s common stockholders of record as of the close of business on May 25, 2016.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words ‘‘believes,’’ ‘‘anticipates,’’ ‘‘plans,’’ ‘‘expects,’’ ‘‘intends’’ and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Liquidity and Capital Resources’’ below and ‘‘Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. All forward-looking statements in this document are based on information available to us as of the date of this Report and we assume no obligation to update any such forward-looking statements.
Our management’s discussion and analysis of financial condition and results of operations is intended to assist readers in understanding our financial information from our management’s perspective and is presented as follows:
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• | Non-GAAP Financial Measures |
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• | Liquidity and Capital Resources |
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• | Contractual Obligations and Off-Balance-Sheet Arrangements |
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• | Critical Accounting Policies and Estimates |
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• | Recent Accounting Pronouncements |
Overview
In January 2016, 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, we completed our acquisition of Telecity Group plc ("TelecityGroup") for a total purchase price of approximately $1.7 billion in cash and 6.9 million shares of our common stock valued at approximately $2.1 billion, for a total of $3.8 billion. In January 2016, we terminated our bridge credit agreement for £875.0 million, or approximately $1.3 billion, related to the TelecityGroup acquisition.
In January 2016, as more fully described in Notes 4 and 5 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we agreed to divest certain data centers, including our London 2 data center in London, UK ("LD2") and certain data centers of TelecityGroup in order to obtain the approval of the European Commission for the acquisition of TelecityGroup. Assets and liabilities of these data centers were included in assets and liabilities held for sale in the condensed consolidated balance sheet as of March 31, 2016. The results of operations for the TelecityGroup data centers that will be divested were classified as net income from discontinued operations, net of tax, from January 15, 2016, the date of the acquisition, through March 31, 2016 in our condensed consolidated statement of operations.
In January 2016, as more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements, we borrowed the full amount of the $250.0 million and £300.0 million, or $431.3 million, made available to us under the second amendment to our Senior Credit Facility to fund the TelecityGroup acquisition.
Equinix provides global data center offerings that protect and connect the world’s most valued information assets. Global enterprises, financial services companies and content and network service providers rely upon Equinix’s leading insight and data centers in 40 markets around the world for the safehousing of their critical IT equipment and the ability to directly connect to the networks that enable today’s information-driven economy. Equinix offers the following solutions: (i) premium data center colocation, (ii) interconnection and (iii) exchange and outsourced IT infrastructure services. As of March 31, 2016, we operated or had partner International Business Exchange® (“IBX”) data centers in the Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, Miami, New York, Philadelphia, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, Toronto and Washington, D.C. metro areas in the Americas region; Bulgaria, France, Finland, Germany, Ireland, Italy, the Netherlands, Poland, Switzerland, Sweden,
Turkey, the United Arab Emirates and the United Kingdom in the Europe, Middle East and Africa (“EMEA”) region; and Australia, China, Hong Kong, Indonesia, Japan and Singapore in the Asia-Pacific region.
Our data centers in 40 markets around the world are 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 that lowers overall cost and increases flexibility. Our focused business model is built 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.
Historically, our market has been served by large telecommunications carriers who have bundled 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. More than 350 companies provide 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 reaches 21 countries with proven operational reliability, improved application performance and network choice, and a highly scalable set of offerings.
Our utilization rate was approximately 80% as of March 31, 2016 and 79% as of March 31, 2015; however, excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our utilization rate would have increased to approximately 83% as of March 31, 2016. Our utilization rate varies from market to market among our IBX data centers across the Americas, EMEA and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our IBX data centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given IBX data center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows.
Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and offerings. As was the case with our recent expansions and acquisitions, our expansion criteria will be dependent on a number of factors, such as demand from new and existing customers, quality of the design, power capacity, access to networks, capacity availability in the current market location, amount of incremental investment required by us in the targeted property, lead-time to break even on a free cash flow basis, and in-place customers. Like our recent expansions and acquisitions, the right combination of these factors may be attractive to us. Depending on the circumstances, these transactions may require additional capital expenditures funded by upfront cash payments or through long-term financing arrangements in order to bring these properties up to Equinix standards. Property expansion may be in the form of purchases of real property, long-term leasing arrangements or acquisitions. Future purchases, construction or acquisitions may be completed by us or with partners or potential customers to minimize the outlay of cash, which can be significant.
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 any given quarter of the past three years, more than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth. During the three months ended March 31, 2016 and 2015, our largest customer accounted for approximately 3% of our recurring revenues. Our 50 largest customers accounted for approximately 36% and 34% of our recurring revenues for the three months ended March 31, 2016 and 2015, respectively.
Our non-recurring revenues are primarily comprised of installation services related to a customer’s initial deployment and professional services that we perform. These services are considered to be non-recurring because they are billed typically once, upon completion of the installation or the professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the expected life of the customer installation. Additionally,
revenue from contract settlements, when a customer wishes to terminate their contract early, is recognized when no remaining performance obligations exist and collectability is reasonably assured, to the extent that the revenue has not previously been recognized. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future.
Our Americas and EMEA revenues are derived primarily from colocation and related interconnection offerings, and our Asia-Pacific revenues are derived primarily from colocation and managed infrastructure offerings.
The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX data centers, utility costs, including electricity and bandwidth, IBX data center employees’ salaries and benefits, including stock-based compensation, repairs and maintenance, supplies and equipment and security services. A substantial majority of our cost of revenues is fixed in nature and should not vary significantly from period to period, unless we expand our existing IBX data centers or open or acquire new IBX data centers. However, there are certain costs which are considered more variable in nature, including utilities and supplies that are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, will generally increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by our customers. In addition, the cost of electricity is generally higher in the summer months as compared to other times of the year. To the extent we incur increased utility costs, such increased costs could materially impact our financial condition, results of operations and cash flows. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change, such increased costs could materially impact our financial condition, results of operations and cash flows.
Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including stock-based compensation, sales commissions, marketing programs, public relations, promotional materials and travel, as well as bad debt expense and amortization of customer contract intangible assets.
General and administrative expenses consist primarily of salaries and related expenses, including stock-based compensation, accounting, legal and other professional service fees, and other general corporate expenses such as our corporate regional headquarters office leases and some depreciation expense.
Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, 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. 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. 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 may periodically increase as a percentage of revenues as we continue to scale our operations to invest in sales and marketing initiatives to further increase our revenue, including the hiring of additional headcount and new product innovations. General and administrative expenses may also periodically increase as a percentage of revenues as we continue to scale our operations to support our growth.
Real Estate Investment Trust (“REIT”) Conversion
We began operating as a REIT for federal income tax purposes effective January 1, 2015. In May 2015, we received a favorable private letter ruling (“PLR”) from the U.S. Internal Revenue Service (“IRS”) in connection with our conversion to a REIT. As of March 31, 2016, our REIT structure includes all of our data center operations in the U.S., Canada and the historical data center operations in Europe and Japan. Our data center operations in other jurisdictions have initially been designated as taxable REIT subsidiaries (“TRSs”).
We initially have designated the legal entities acquired in the Bit-isle acquisition as TRSs, which we believe will not impact our qualification for taxation as a REIT. We plan to integrate the data center assets of the Bit-isle business into our REIT structure during the first half of 2017.
We initially will designate the legal entities acquired in the TelecityGroup acquisition as TRSs, which we believe will not impact our qualification for taxation as a REIT. We plan to integrate a significant portion of the TelecityGroup businesses into our REIT structure by the end of 2016 and to complete almost all remaining TelecityGroup REIT integration efforts during the first half of 2017.
As a REIT, we generally are permitted to deduct from federal taxable income the dividends we pay to our stockholders (including, for this purpose, the value of any deemed distribution on account of adjustments to the conversion rate relating to our outstanding debt securities that are convertible into our common stock). The income represented by such dividends is not subject to federal taxation at the entity level but is taxed, if at all, at the stockholder level. Nevertheless, the income of our TRSs which hold our U.S. operations that may not be REIT-compliant, are subject, as applicable, to federal and state corporate income tax. Likewise, our foreign subsidiaries 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 TRSs or through qualified REIT subsidiaries (“QRSs”). We are also subject to a separate corporate income tax on gain recognized from a sale of a REIT asset where our basis in the asset is determined by reference to the basis of the asset in the hands of a former C corporation (such as (i) an asset that we held as of the effective date of our REIT election, that is January 1, 2015 or (ii) an asset that we hold in a QRS following the liquidation or other conversion of a former TRS). This built-in-gains tax is generally applicable to any disposition of such an asset during the five-year period after the date we first owned the asset as a REIT asset (e.g., January 1, 2015 in the case of REIT assets we held at the time of our REIT conversion), to the extent of the built-in-gain based on the fair market value of such asset on the date we first held the asset as a REIT asset. If we fail to qualify for taxation as a REIT, we will be subject to federal income tax at regular corporate rates. Even if we remain qualified for taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property in addition to taxes owed with respect to our TRSs' operations. In particular, while state income tax regimes often parallel the federal income tax regime for REITs, many states do not completely follow federal rules and some may not follow them at all.
We began paying quarterly cash dividends in 2015 in connection with our conversion to a REIT. On March 23, 2016 we paid a quarterly cash dividend of $1.75 per share and on May 4, 2016 we declared a quarterly cash dividend of $1.75 per share, payable on June 15, 2016 to stockholders of record on May 25, 2016. We expect the amount of all 2016 quarterly distributions and the value of the deemed distributions on account of all the adjustments to the conversion rate relating to our outstanding 4.75% convertible subordinated notes that are made in 2016 prior to the maturity of the convertible subordinated notes will equal or exceed the taxable income to be recognized in 2016.
We continue to monitor our REIT compliance to maintain our qualification for taxation as a REIT. For this and other reasons, as necessary we may convert certain of our data center operations in additional countries into the REIT structure in future periods.
Results of Operations
Our results of operations for the three months ended March 31, 2015 include the results of operations of Bit-isle from January 1, 2016 and the results of operations of TelecityGroup from January 16, 2016.
Discontinued Operations
We present the results of operations associated with the TelecityGroup data centers that will be divested as discontinued operations in our condensed consolidated statement of operations for the three months ended March 31, 2016. We did not have any discontinued operations activity during 2015.
Three Months Ended March 31, 2016 and 2015
Revenues. Our revenues for the three months ended March 31, 2016 and 2015 were generated from the following revenue classifications and geographic regions (dollars in thousands):
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| Three months ended March 31, | | % change |
| 2016 | | % | | 2015 | | % | | Actual | | Constant currency |
Americas: | | | | | | | | | | | |
Recurring revenues | $ | 380,156 |
| | 45 | % | | $ | 347,054 |
| | 54 | % | | 10 | % | | 12 | % |
Non-recurring revenues | 24,238 |
| | 3 | % | | 16,915 |
| | 3 | % | | 43 | % | | 44 | % |
| 404,394 |
| | 48 | % | | 363,969 |
| | 57 | % | | 11 | % | | 13 | % |
EMEA: | | | | | | | | | | | |
Recurring revenues | 253,381 |
| | 30 | % | | 153,424 |
| | 24 | % | | 65 | % | | 69 | % |
Non-recurring revenues | 14,475 |
| | 2 | % | | 11,199 |
| | 2 | % | | 29 | % | | 33 | % |
| 267,856 |
| | 32 | % | | 164,623 |
| | 26 | % | | 63 | % | | 67 | % |
Asia-Pacific: | | | | | | | | | | | |
Recurring revenues | 163,557 |
| | 19 | % | | 109,179 |
| | 17 | % | | 50 | % | | 53 | % |
Non-recurring revenues | 8,349 |
| | 1 | % | | 5,403 |
| | 0 | % | | 55 | % | | 59 | % |
| 171,906 |
| | 20 | % | | 114,582 |
| | 17 | % | | 50 | % | | 54 | % |
Total: | | | | | | | | | | | |
Recurring revenues | 797,094 |
| | 94 | % | | 609,657 |
| | 95 | % | | 31 | % | | 34 | % |
Non-recurring revenues | 47,062 |
| | 6 | % | | 33,517 |
| | 5 | % | | 40 | % | | 43 | % |
| $ | 844,156 |
| | 100 | % | | $ | 643,174 |
| | 100 | % | | 31 | % | | 34 | % |
Americas Revenues. Our revenues from the U.S., the largest revenue contributor in the Americas region for the period, represented approximately 93% and 92%, respectively, of the regional revenues during the three months ended March 31, 2016 and 2015. Growth in Americas revenues was primarily due to (i) approximately $11.0 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas, Silicon Valley and Washington, D.C. metro areas and (ii) an increase in orders from both our existing customers and new customers during the period. During the three months ended March 31, 2016, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian real than during the three months ended March 31, 2015, resulting in approximately $8.3 million of net unfavorable foreign currency impact to our Americas revenues during the three months ended March 31, 2016 compared to average exchange rates of the three months ended March 31, 2015. 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 Atlanta, New York, São Paulo, Silicon Valley and Washington D.C. metro areas, which are expected to open during the remainder of 2016 and 2017. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts.
EMEA Revenues. Revenues for our EMEA region for the three months ended March 31, 2016 include $84.4 million of revenues attributable to our acquisition of TelecityGroup, which closed on January 15, 2016. After our acquisition of TelecityGroup, the UK continues to be our largest revenue contributor in the EMEA region, providing 34% of regional revenues for the three months ended March 31, 2016 compared to 37% of regional revenues for the three months ended March 31, 2015 without TelecityGroup. Our EMEA revenue growth was primarily due to (i) $84.4 million of revenues attributable to TelecityGroup, (ii) approximately
$13.6 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, Paris and Zurich metro areas and (iii) an increase in orders from both our existing customers and new customers during the period. During the three months ended March 31, 2016, the impact of foreign currency fluctuations resulted in approximately $6.4 million of net unfavorable foreign currency impact to our EMEA revenues primarily due to a generally stronger U.S. dollar relative to the British pound and Euro during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Amsterdam, Dublin, Frankfurt, London and Warsaw metro areas, which are expected to open during the remainder of 2016 and 2017 as well as our acquisition of TelecityGroup. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts as well as our acquisition of TelecityGroup.
Asia-Pacific Revenues. Revenues for our Asia-Pacific region for the three months ended March 31, 2016 include $34.2 million of revenues attributable to our acquisition of Bit-isle, which closed in November 2015. After our acquisition of Bit-isle, Japan is our largest revenue contributor in the Asia-Pacific region, providing 34% of regional revenues including Bit-isle for the three months ended March 31, 2016 compared to 15% for the three months ended March 31, 2015 without Bit-isle. Excluding revenues attributable to Bit-isle, our revenues from Singapore, which was our largest revenue contributor in the Asia-Pacific region before we acquired Bit-isle, represented approximately 38% and 39%, respectively, of the regional revenues for the three months ended March 31, 2016 and 2015. Our Asia-Pacific revenue growth was primarily due to (i) $34.2 of revenues attributable to Bit-isle, (ii) approximately $19.3 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Melbourne, Shanghai, Singapore, Sydney and Tokyo metro areas and (iii) an increase in orders from both our existing customers and new customers during the period. During the three months ended March 31, 2016, the U.S. dollar was generally stronger relative to the Australian and Singapore dollars, than during the three months ended March 31, 2015, resulting in approximately $4.1 million of net unfavorable foreign currency impact to our Asia-Pacific revenues during the three months ended March 31, 2016 when compared to average exchange rates during the three months ended March 31, 2015. 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 centers and additional expansions currently taking place in the Hong Kong and Sydney metro areas, which are expected to open during the remainder of 2016 and 2017. 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 as well as the impact of our acquisition of Bit-isle.
Cost of Revenues. Our cost of revenues for the three months ended March 31, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
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| Three months ended March 31, | | % change |
| 2016 | | % | | 2015 | | % | | Actual | | Constant currency |
Americas | $ | 170,126 |
| | 40 | % | | $ | 150,369 |
| | 50 | % | | 13 | % | | 17 | % |
EMEA | 151,762 |
| | 35 | % | | 81,216 |
| | 28 | % | | 87 | % | | 91 | % |
Asia-Pacific | 105,792 |
| | 25 | % | | 66,728 |
| | 22 | % | | 59 | % | | 61 | % |
Total | $ | 427,680 |
| | 100 | % | | $ | 298,313 |
| | 100 | % | | 43 | % | | 47 | % |
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| Three months ended March 31, |
| 2016 | | 2015 |
Cost of revenues as a percentage of revenues: | | | |
Americas | 42 | % | | 41 | % |
EMEA | 57 | % | | 49 | % |
Asia-Pacific | 62 | % | | 58 | % |
Total | 51 | % | | 46 | % |
Americas Cost of Revenues. Depreciation expense was $58.8 million and $53.4 million for the three months ended March 31, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX expansion activity. In addition to the increase in depreciation expense, the increase in our Americas cost of revenues for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was primarily due to (i) $4.9 million of higher utilities, rent and facilities costs in support of our business growth and (ii) $4.2 million of higher costs associated with equipment resales to support growth
of our non-recurring revenues. During the three months ended March 31, 2016, the impact of foreign currency fluctuations resulted in approximately $6.4 million of net favorable foreign currency impact to our Americas cost of revenues primarily due to a generally stronger U.S. dollar relative to the Brazilian real and Canadian dollar during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. We expect Americas cost of revenues to increase as we continue to grow our business.
EMEA Cost of Revenues. Cost of revenues for our EMEA region for the three months ended March 31, 2016 includes $60.6 million of cost of revenues attributable to our acquisition of TelecityGroup, which closed on January 15, 2016. Excluding cost of revenues attributable to TelecityGroup, EMEA cost of revenues was $91.1 million for the three months ended March 31, 2016 compared to $81.2 million for the three months ended March 31, 2015. Depreciation expense, excluding TelecityGroup, was $25.4 million and $22.0 million for the three months ended March 31, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding the impact of our acquisition of TelecityGroup, the remaining increase in our EMEA cost of revenues, was primarily due to $3.9 million of higher utilities and repairs and maintenance costs in support of our business growth. During the three months ended March 31, 2016 the impact of foreign currency fluctuations to our EMEA cost of revenues resulted in approximately $3.0 million of net favorable foreign currency impact to our EMEA cost of revenues primarily due to a generally stronger U.S. dollar relative to the British pound and Euro during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. We expect EMEA cost of revenues to increase as we continue to grow our business and as a result of our acquisition of TelecityGroup.
Asia-Pacific Cost of Revenues. Cost of revenues for our Asia-Pacific region for the three months ended March 31, 2016 includes $27.0 million of cost of revenues attributable to our acquisition of Bit-isle, which closed in November 2015. Excluding cost of revenues attributable to Bit-isle, Asia-Pacific cost of revenues was $78.8 million for the three months ended March 31, 2016 compared to $66.7 million for the three months ended March 31, 2015, primarily due to an increase in depreciation expense. Depreciation expense, excluding Bit-isle, was $34.7 million and $27.2 million for the three months ended March 31, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX data center expansion activity. For the three months ended March 31, 2016, the impact of foreign currency fluctuations to our Asia-Pacific cost of revenues was not significant when compared to average exchange rates of the three months ended March 31, 2015. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business, including from the impact of our acquisition of Bit-isle.
Sales and Marketing Expenses. Our sales and marketing expenses for the three months ended March 31, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
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| Three months ended March 31, | | % change |
| 2016 | | % | | 2015 | | % | | Actual | | Constant currency |
Americas | $ | 57,753 |
| | 54 | % | | $ | 49,045 |
| | 62 | % | | 18 | % | | 20 | % |