UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-31293
EQUINIX, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 77-0487526 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
301 Velocity Way, Fifth Floor, Foster City, California 94404
(Address of principal executive offices, including ZIP code)
(650) 513-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) Yes x No ¨ and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b of the Exchange Act). Yes ¨ No x.
The number of shares outstanding of the Registrant’s Common Stock as of March 31, 2004 was 18,108,032.
EQUINIX, INC.
| Page No. | ||||
| Part I. Financial Information | ||||
| Item 1. |
Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 |
3 | ||
| Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2003 |
4 | |||
| Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 |
5 | |||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||
| 34 | ||||
| Item 3. |
42 | |||
| Item 4. |
43 | |||
| Part II. Other Information | ||||
| Item 1. |
44 | |||
| Item 2. |
44 | |||
| Item 3. |
44 | |||
| Item 4. |
45 | |||
| Item 5. |
45 | |||
| Item 6. |
46 | |||
| 52 | ||||
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
EQUINIX, INC.
Condensed Consolidated Balance Sheets
(in thousands)
| March 31, 2004 |
December 31, 2003 |
|||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 68,843 | $ | 60,428 | ||||
| Short-term investments |
19,795 | 12,543 | ||||||
| Accounts receivable, net |
10,079 | 10,178 | ||||||
| Prepaids and other current assets |
2,168 | 3,139 | ||||||
| Total current assets |
100,885 | 86,288 | ||||||
| Property and equipment, net |
334,295 | 343,554 | ||||||
| Goodwill |
21,412 | 21,228 | ||||||
| Debt issuance costs, net |
3,625 | 5,954 | ||||||
| Other assets |
6,956 | 7,508 | ||||||
| Total assets |
$ | 467,173 | $ | 464,532 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued expenses |
$ | 18,416 | $ | 18,880 | ||||
| Accrued interest payable |
2,254 | 1,114 | ||||||
| Current portion of debt facilities and capital lease obligations |
— | 2,689 | ||||||
| Current portion of credit facility |
— | 12,000 | ||||||
| Other current liabilities |
3,701 | 3,843 | ||||||
| Total current liabilities |
24,371 | 38,526 | ||||||
| Debt facilities and capital lease obligations, less current portion |
— | 723 | ||||||
| Credit facility, less current portion |
— | 22,281 | ||||||
| Senior notes |
— | 29,220 | ||||||
| Convertible secured notes |
30,218 | 31,683 | ||||||
| Convertible subordinated debentures |
86,250 | — | ||||||
| Deferred rent and other liabilities |
23,411 | 22,022 | ||||||
| Total liabilities |
164,250 | 144,455 | ||||||
| Stockholders’ equity: |
||||||||
| Preferred stock |
2 | 2 | ||||||
| Common stock |
18 | 15 | ||||||
| Additional paid-in capital |
768,058 | 755,698 | ||||||
| Deferred stock-based compensation |
(661 | ) | (1,032 | ) | ||||
| Accumulated other comprehensive income |
1,452 | 1,198 | ||||||
| Accumulated deficit |
(465,946 | ) | (435,804 | ) | ||||
| Total stockholders’ equity |
302,923 | 320,077 | ||||||
| Total liabilities and stockholders’ equity |
$ | 467,173 | $ | 464,532 | ||||
See accompanying notes to condensed consolidated financial statements.
3
EQUINIX, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (unaudited) | ||||||||
| Revenues |
$ | 36,820 | $ | 25,435 | ||||
| Costs and operating expenses: |
||||||||
| Cost of revenues |
33,785 | 30,619 | ||||||
| Sales and marketing |
4,642 | 4,703 | ||||||
| General and administrative |
8,242 | 10,924 | ||||||
| Total costs and operating expenses |
46,669 | 46,246 | ||||||
| Loss from operations |
(9,849 | ) | (20,811 | ) | ||||
| Interest income |
242 | 70 | ||||||
| Interest expense |
(4,130 | ) | (4,812 | ) | ||||
| Loss on debt extinguishment and conversion |
(16,211 | ) | — | |||||
| Net loss before income taxes |
(29,948 | ) | (25,553 | ) | ||||
| Income taxes |
(194 | ) | — | |||||
| Net loss |
$ | (30,142 | ) | $ | (25,553 | ) | ||
| Net loss per share: |
||||||||
| Basic and diluted |
$ | (2.00 | ) | $ | (3.00 | ) | ||
| Weighted average shares |
15,104 | 8,512 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
EQUINIX, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
| Three months ended March 31, |
||||||||
| 2004 |
2003 |
|||||||
| (unaudited) | ||||||||
| Cash flows from operating activities: |
||||||||
| Net loss |
$ | (30,142 | ) | $ | (25,553 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
||||||||
| Depreciation and accretion |
14,315 | 16,254 | ||||||
| Amortization of intangible assets |
514 | 525 | ||||||
| Amortization of deferred stock-based compensation |
677 | 958 | ||||||
| Non-cash interest expense |
2,615 | 2,086 | ||||||
| Allowance for doubtful accounts |
70 | 154 | ||||||
| Deferred rent |
1,639 | 833 | ||||||
| Loss on disposal of assets |
2 | — | ||||||
| Loss on debt extinguishment and conversion |
16,211 | — | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable |
29 | (1,677 | ) | |||||
| Prepaids and other current assets |
971 | 2,538 | ||||||
| Other assets |
46 | 172 | ||||||
| Accounts payable and accrued expenses |
190 | (2,642 | ) | |||||
| Accrued restructuring charges |
(458 | ) | (7,919 | ) | ||||
| Accrued merger and financing costs |
— | (3,768 | ) | |||||
| Accrued interest payable |
(36 | ) | (990 | ) | ||||
| Other current liabilities |
(142 | ) | (366 | ) | ||||
| Other liabilities |
(20 | ) | (163 | ) | ||||
| Net cash provided by (used in) operating activities |
6,481 | (19,558 | ) | |||||
| Cash flows from investing activities: |
||||||||
| Purchase of short-term investments |
(17,744 | ) | — | |||||
| Sales of short-term investments |
2,001 | — | ||||||
| Maturities of short-term investments |
8,500 | — | ||||||
| Purchases of property and equipment |
(4,908 | ) | (346 | ) | ||||
| Accrued property and equipment |
(196 | ) | — | |||||
| Sale of restricted cash and short-term investments |
— | 1,989 | ||||||
| Net cash provided by (used in) investing activities |
(12,347 | ) | 1,643 | |||||
| Cash flows from financing activities: |
||||||||
| Proceeds from exercise of warrants, stock options and employee stock purchase plan |
2,060 | 159 | ||||||
| Proceeds from convertible subordinated debentures |
86,250 | — | ||||||
| Repayment of debt facilities and capital lease obligations |
(3,527 | ) | (2,518 | ) | ||||
| Repayment of credit facility |
(34,281 | ) | — | |||||
| Repayment of senior notes |
(30,475 | ) | — | |||||
| Debt issuance costs |
(3,222 | ) | — | |||||
| Debt extinguishment costs |
(2,505 | ) | — | |||||
| Net cash provided by (used in) financing activities |
14,300 | (2,359 | ) | |||||
| Effect of foreign currency exchange rates on cash and cash equivalents |
(19 | ) | 36 | |||||
| Net increase (decrease) in cash and cash equivalents |
8,415 | (20,238 | ) | |||||
| Cash and cash equivalents at beginning of period |
60,428 | 41,216 | ||||||
| Cash and cash equivalents at end of period |
$ | 68,843 | $ | 20,978 | ||||
| Supplemental cash flow information: |
||||||||
| Cash paid for interest |
$ | 1,579 | $ | 3,793 | ||||
See accompanying notes to condensed consolidated financial statements.
5
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Significant Accounting Policies
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 present fairly the financial position and the results of operations for the interim periods presented. The balance sheet at December 31, 2003 has been derived from audited financial statements at that date. The 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. 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 March 5, 2004. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
In February 2004, the Company sold $86.3 million in aggregate principal of 2.5% Convertible Subordinated Debentures due 2024 to qualified institutional buyers. The Company used the net proceeds from this offering to repay all amounts outstanding under the Credit Facility, the Heller Loan Amendment, the VLL Loan Amendment and the Senior Notes during February and March 2004. All remaining proceeds will be used for general corporate purposes. In addition, in March 2004, holders of the Company’s $10.0 million in Convertible Secured Notes issued in connection with the Crosslink Financing, converted the $10.0 million of principal into 2.5 million shares of the Company’s common stock. The Company refers to this transaction as the “Crosslink Conversion”. As a result of the extinguishment of debt associated with the Credit Facility, Heller Loan Amendment, VLL Loan Amendment and the Senior Notes, as well as the Crosslink Conversion, the Company recognized a loss on debt extinguishment and conversion totaling $16.2 million (see Note 8).
As of March 31, 2004, the Company had $88.6 million of cash, cash equivalents and short-term investments. The Company believes that this cash, coupled with anticipated cash flows generated from operations, will be sufficient to meet the Company’s capital expenditure, working capital, debt service and corporate overhead requirements to meet the Company’s currently identified business objectives.
6
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Revenue Recognition and Allowance for Doubtful Accounts
Equinix derives more than 90% of its revenues from recurring revenue streams, consisting primarily of (1) colocation services, such as from the licensing of cabinet space and power; (2) interconnection services, such as cross connects and Gigabit Ethernet ports and (3) managed infrastructure services, such as Equinix Direct, bandwidth and other e-business services such as mail service and managed platform solutions. The remainder of the Company’s revenues are from non-recurring revenue streams, such as from the recognized portion of deferred installation revenues, professional services, contract settlements and equipment sales. Revenues from recurring revenue streams are billed monthly and recognized ratably over the term of the contract, generally one to three years. Fees for the provision of e-business services are recognized progressively as the services are rendered in accordance with the contract terms, except where the future costs cannot be estimated reliably, in which case fees are recognized upon the completion of services. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the term of the related contract. Professional service fees are recognized in the period in which the services were provided and represent the culmination of the earnings process. Revenue from bandwidth and equipment is recognized on a gross basis in accordance with EITF Abstract No. 99-19, “Recording Revenue as a Principal versus Net as an Agent”, primarily because the Company acts as the principal in the transaction, takes title to products and services and bears inventory and credit risk. Revenue from contract settlements is recognized on a cash basis when no remaining performance obligations exist to the extent that the revenue has not previously been recognized.
The Company generally guarantees certain service levels, such as uptime, as outlined in individual customer contracts. To the extent that these service levels are not achieved, the Company reduces revenue for any credits given to the customer as a result. The Company generally has the ability to determine such service level credits prior to the associated revenue being recognized, and historically, these credits have not been significant.
Revenue is recognized only when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. It is customary business practice to obtain a signed master sales agreement and sales order prior to recognizing revenue in an arrangement. The Company assesses collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers. If the Company determines that collection of a fee is not reasonably assured, the Company defers the fee and recognizes revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. In addition, Equinix also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for those customers that the Company had expected to collect the revenues. If the financial condition of Equinix’s customers were to deteriorate or if they become insolvent, resulting in an impairment of their ability to make payments, allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and analyzes current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the Company’s reserves.
7
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Net Loss per Share
The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share,” and SEC Staff Accounting Bulletin (“SAB”) No. 98. Under the provisions of SFAS No. 128 and SAB No. 98 basic and diluted net loss per share are computed using the weighted average number of common shares outstanding. Options, warrants and preferred stock were not included in the computation of diluted net loss per share because the effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted net