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EX-21.1 - SUBSIDIARIES OF EQUINIX, INC. - EQUINIX INCdex211.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - EQUINIX INCdex321.htm
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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2009

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 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  ¨    No  ¨

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

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

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

The number of shares outstanding of the registrant’s Common Stock as of September 30, 2009 was 38,983,344.

 

 

 


Table of Contents

EQUINIX, INC.

INDEX

 

          Page
No.
Part I - Financial Information   
Item 1.    Condensed Consolidated Financial Statements (unaudited):   
   Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008    3
   Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008    4
   Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008    5
   Notes to Condensed Consolidated Financial Statements    6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    35
Item 3.    Quantitative and Qualitative Disclosures About Market Risk    51
Item 4.    Controls and Procedures    51
Part II - Other Information   
Item 1.    Legal Proceedings    52
Item 1A.    Risk Factors    53
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    68
Item 3.    Defaults Upon Senior Securities    68
Item 4.    Submission of Matters to a Vote of Security Holders    68
Item 5.    Other Information    69
Item 6.    Exhibits    70
Signatures    77
Index to Exhibits    78

 

2


Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

     September 30,
2009
    December 31,
2008
 
     (unaudited)  
Assets     

Current assets:

    

Cash and cash equivalents

   $ 283,147      $ 220,207   

Short-term investments

     326,234        42,112   

Accounts receivable, net

     67,589        66,029   

Current portion of deferred tax assets, net

     15,163        35,936   

Other current assets

     21,961        15,227   
                

Total current assets

     714,094        379,511   

Long-term investments

     18,061        45,626   

Property, plant and equipment, net

     1,703,009        1,492,830   

Goodwill

     377,556        342,829   

Intangible assets, net

     52,062        50,918   

Deferred tax assets, net

     43,938        65,228   

Other assets

     53,858        57,794   
                

Total assets

   $ 2,962,578      $ 2,434,736   
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 104,288      $ 74,317   

Accrued property, plant and equipment

     64,598        89,518   

Current portion of capital lease and other financing obligations

     6,347        4,499   

Current portion of mortgage and loans payable

     53,101        52,054   

Current portion of convertible debt

     —          19,150   

Other current liabilities

     51,827        50,455   
                

Total current liabilities

     280,161        289,993   

Capital lease and other financing obligations, less current portion

     154,179        133,031   

Mortgage and loans payable, less current portion

     394,263        386,446   

Convertible debt, less current portion

     888,364        608,510   

Other liabilities

     111,177        100,095   
                

Total liabilities

     1,828,144        1,518,075   
                

Commitments and contingencies (Note 9)

    

Stockholders’ equity:

    

Common stock

     39        38   

Additional paid-in capital

     1,636,984        1,524,834   

Accumulated other comprehensive loss

     (98,887     (152,800

Accumulated deficit

     (403,702     (455,411
                

Total stockholders’ equity

     1,134,434        916,661   
                

Total liabilities and stockholders’ equity

   $ 2,962,578      $ 2,434,736   
                

See accompanying notes to condensed consolidated financial statements

 

3


Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2009     2008
As Adjusted
(Note 2)
    2009     2008
As Adjusted
(Note 2)
 
     (unaudited)  

Revenues

   $ 227,558      $ 183,735      $ 639,957      $ 513,997   
                                

Costs and operating expenses:

        

Cost of revenues

     126,007        109,905        356,346        306,453   

Sales and marketing

     15,543        16,009        46,315        46,650   

General and administrative

     39,071        35,529        111,677        111,350   

Restructuring charges

     —          799        (6,053     799   

Acquisition costs

     1,379        —          1,379        —     
                                

Total costs and operating expenses

     182,000        162,242        509,664        465,252   
                                

Income from operations

     45,558        21,493        130,293        48,745   

Interest income

     353        1,968        1,949        7,820   

Interest expense

     (22,256     (15,671     (51,619     (45,179

Other-than-temporary impairment loss on investments

     —          (1,527     (2,687     (1,527

Other income (expense)

     2,484        (520     3,675        602   
                                

Income before income taxes

     26,139        5,743        81,611        10,461   

Income tax expense

     (7,327     (187     (29,902     (400
                                

Net income

   $ 18,812      $ 5,556      $ 51,709      $ 10,061   
                                

Earnings per share:

        

Basic earnings per share

   $ 0.49      $ 0.15      $ 1.35      $ 0.27   
                                

Weighted-average shares

     38,787        37,268        38,270        36,976   
                                

Diluted earnings per share

   $ 0.47      $ 0.15      $ 1.32      $ 0.27   
                                

Weighted-average shares

     39,887        38,023        39,305        37,854   
                                

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Nine months ended
September 30,
 
     2009     2008
As Adjusted
(Note 2)
 
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 51,709      $ 10,061   

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

    

Depreciation

     126,958        110,206   

Stock-based compensation

     39,030        41,951   

Restructuring charges

     (6,053     799   

Amortization of intangible assets

     4,100        5,236   

Amortization of debt issuance costs and debt discount

     12,210        8,635   

Accretion of asset retirement obligation and accrued restructuring charges

     1,046        1,245   

Realized net (gains) losses on investments

     2,679        (1,063

Other items

     785        1,348   

Changes in operating assets and liabilities:

    

Accounts receivable

     (23     (3,783

Deferred tax assets, net

     20,750        —     

Other assets

     (7,852     (2,018

Accounts payable and accrued expenses

     27,638        5,015   

Other liabilities

     5        13,631   
                

Net cash provided by operating activities

     272,982        191,263   
                

Cash flows from investing activities:

    

Purchases of investments

     (309,666     (240,556

Sales of investments

     24,697        71,141   

Maturities of investments

     26,387        93,268   

Purchase of Upminster, net of cash acquired

     (28,176     —     

Purchase of Virtu, net of cash acquired

     —          (23,241

Purchases of other property, plant and equipment

     (240,440     (305,546

Accrued property, plant and equipment

     (27,362     (16,015

Purchase of restricted cash

     (895     (14,234

Release of restricted cash

     12,882        333   

Other investing activities

     79        —     
                

Net cash used in investing activities

     (542,494     (434,850
                

Cash flows from financing activities:

    

Proceeds from employee equity awards

     23,050        26,087   

Proceeds from convertible debt

     373,750        —     

Proceeds from loans payable

     28,679        102,101   

Repayment of capital lease and other financing obligations

     (3,765     (2,874

Repayment of mortgage and loans payable

     (34,525     (11,456

Capped call costs

     (49,664     —     

Debt issuance costs

     (8,210     —     

Other financing activities

     (2,795     (908
                

Net cash provided by financing activities

     326,520        112,950   
                

Effect of foreign currency exchange rates on cash and cash equivalents

     5,932        689   
                

Net increase (decrease) in cash and cash equivalents

     62,940        (129,948

Cash and cash equivalents at beginning of period

     220,207        290,633   
                

Cash and cash equivalents at end of period

   $ 283,147      $ 160,685   
                

Supplemental cash flow information:

    

Cash paid for taxes

   $ 5,829      $ 405   
                

Cash paid for interest

   $ 36,016      $ 35,486   
                

See accompanying notes to condensed consolidated financial statements

 

5


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 at December 31, 2008 has been derived from audited consolidated financial statements at 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. For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinix’s Form 8-K as filed with the SEC on June 8, 2009. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.

As a result of a Financial Accounting Standards Board (“FASB”) amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) (see “2.50% Convertible Subordinated Notes” in Note 8) and a FASB amendment related to the accounting for instruments granted in share-based payment transactions that are considered participating securities prior to vesting and, therefore, should be included in the calculation of earnings per share (“EPS”) (see “Earnings per Share” below), the Company adjusted comparative condensed consolidated statements of operations and statements of cash flows previously issued to reflect such changes in accounting principles (see Note 2).

Basis of Presentation and Consolidation

The accompanying condensed consolidated financial statements include the accounts of Equinix and its subsidiaries, including the operations of Upminster GmbH (“Upminster”) from July 22, 2009 (see Note 3). All significant intercompany accounts and transactions have been eliminated in consolidation.

Reclassification

Certain amounts in the accompanying condensed consolidated financial statements have been reclassified to conform to the condensed consolidated financial statement presentation as of and for the three and nine months ended September 30, 2009.

Property, Plant and Equipment

During the three months ended September 30, 2009, the Company reassessed the estimated useful lives of certain of its property, plant and equipment as part of a review of the related assumptions. As a result, the estimated useful lives of certain of the Company’s property, plant and equipment within the below table were affected.

 

     Estimated Useful Life
     Original    Revised
     (in years)

IBX plant and machinery

   2-13    2-25

Leasehold improvements

   10-20    10-20

Site improvements

   10-15    10-15

Buildings

   40-50    30-50

IBX equipment

   2-13    2-15

Computer equipment and software

   2-5    2-5

Furniture and fixtures

   2-5    2-10

 

6


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company undertook this review due to its determination that it was generally using certain of its existing assets longer than originally anticipated and, therefore, certain estimated useful lives have been lengthened. The change in the estimated useful lives of certain of the Company’s property, plant and equipment was accounted for as a change in accounting estimate on a prospective basis effective July 1, 2009 under the accounting standard related to change in accounting estimates.

The change in estimated useful lives of certain of the Company’s property, plant and equipment, which has resulted in less depreciation expense than would have otherwise been recorded, resulted in the following increases (in thousands, except per share amounts):

 

     Three
months
ended
   Nine
months
ended
     September 30, 2009

Income from operations

   $ 4,804    $ 4,804

Net income

     2,993      2,993

Earnings per share:

     

Basic and diluted

     0.08      0.08

Earnings per Share

In April 2008, the FASB issued an amendment related to the accounting for instruments granted in share-based payment transactions that are considered participating securities prior to vesting and, therefore, should be included in the calculation of EPS, which requires that all prior-period EPS data presented shall be adjusted retrospectively and was effective for the Company beginning January 1, 2009. This accounting standard did not have a significant impact on the Company’s historical EPS calculations.

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Numerator:

           

Numerator for basic earnings per share

   $ 18,812    $ 5,556    $ 51,709    $ 10,061
                           

Effect of assumed conversion of convertible debt:

           

Interest expense, net of tax

     —        —        23      —  
                           

Numerator for diluted earnings per share

   $ 18,812    $ 5,556    $ 51,732    $ 10,061
                           

Denominator:

           

Weighted-average shares

     38,787      37,268      38,270      36,976
                           

Effect of dilutive securities:

           

Convertible subordinated debentures

     —        —        282      —  

Employee equity awards

     1,100      755      753      878
                           

Total dilutive potential shares

     1,100      755      1,035      878
                           

Denominator for diluted earnings per share

     39,887      38,023      39,305      37,854
                           

Earnings per share:

           

Basic

   $ 0.49    $ 0.15    $ 1.35    $ 0.27
                           

Diluted

   $ 0.47    $ 0.15    $ 1.32    $ 0.27
                           

 

7


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Shares reserved for conversion of convertible subordinated debentures

   —      816    —      816

Shares reserved for conversion of 2.50% convertible subordinated notes

   2,232    2,232    2,232    2,232

Shares reserved for conversion of 3.00% convertible subordinated notes

   2,945    2,945    2,945    2,945

Shares reserved for conversion of 4.75% convertible subordinated notes

   4,433    —      1,851    —  

Common stock warrants

   1    1    1    1

Common stock related to employee equity awards

   1,023    1,386    1,506    1,371
                   
   10,634    7,380    8,535    7,365
                   

Income Taxes

The Company’s effective tax rates were 36.6% and 3.8% for the nine months ended September 30, 2009 and 2008, respectively. The effective tax rate for the nine months ended September 30, 2009 is substantially higher than the effective tax rate for the same period of 2008, as well as the effective tax rate for fiscal 2008, primarily as a result of the Company’s release of the valuation allowance against the net deferred tax assets of its domestic operations which achieved sufficient profitability in the fourth quarter of 2008.

During the three months ended September 30, 2009, the Company recorded $4,024,000 of deferred tax assets attributable to its Hong Kong operations as a result of a release of the valuation allowance against the deferred tax assets. In reaching this decision, the Company assessed both the positive and negative evidence, which included the following:

Positive Evidence

 

   

The establishment of a cumulative profitability by the Hong Kong operations for the past 12 quarters including the three months ended September 30, 2009.

 

   

The Company expects that during the remainder of 2009 and thereafter the Hong Kong operations will be profitable, even after considering the effects of the global financial crisis and credit crunch.

 

   

The indefinite carry-over periods for the net operating losses generated by the Hong Kong operations.

Negative Evidence

 

   

The lack of profitability history of the Hong Kong operations until 2009.

 

   

The impact of the global recession to the Hong Kong operations.

When conducting the quantitative and qualitative analysis of all the positive and negative evidence listed above, the Company gave significant weight to the achievement of three years of cumulative profitability that was achieved in the third quarter of 2009. Therefore, the Company concluded that the positive evidence outweighed the negative evidence and that it is more likely than not that the deferred tax assets will be fully realizable in its Hong Kong operations.

 

8


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As a result of the adoption of an accounting standard update related to the accounting for business combinations on January 1, 2009, the Company’s tax provision will be reduced in future periods to the extent that the Company has not recognized the deferred tax assets associated with any subsidiaries acquired in previous business combinations for which goodwill exists. The recognition of such deferred tax assets in the periods subsequent to the adoption of the accounting standard update will benefit the Company’s consolidated statements of operations at the time such recognition occurs. Prior to the accounting standard update, such releases were recorded against goodwill.

Interest Charges

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Interest expense

   $ 22,256    $ 15,671    $ 51,619    $ 45,179

Interest capitalized

     2,628      2,034      10,397      6,701
                           

Interest charges incurred

   $ 24,884    $ 17,705    $ 62,016    $ 51,880
                           

Fair Value of Financial Instruments

The carrying value of many of the Company’s financial instruments, including cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable and accrued expenses and accrued property, plant and equipment approximate their fair value due primarily to the short-term maturity of the related instruments. The fair value of the Company’s convertible debt, which is traded in the market, is based on quoted market prices. The fair value of the Company’s mortgage and loans payable, which are not traded in the market, is estimated by considering the Company’s credit rating, current rates available to the Company for debt of the same remaining maturities and the terms of the debt.

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

 

     September 30, 2009    December 31, 2008
     Carrying
Value
   Fair Value    Carrying
Value
   Fair Value

Convertible Debt:

           

Convertible subordinated debentures

   $ —      $ —      $ 19,150    $ 19,290

2.50% convertible subordinated notes

     220,247      223,899      212,524      128,552

3.00% convertible subordinated notes

     395,986      419,860      395,986      251,451

4.75% convertible subordinated notes

     272,131      299,360      —        —  
                           
   $ 888,364    $ 943,119    $ 627,660    $ 399,293
                           

Mortgage and Loans Payable:

           

Mortgage payable

   $ 92,432    $ 97,403    $ 94,362    $ 80,221

Chicago IBX financing

     109,991      106,369      109,991      103,184

Asia-Pacific financing

     72,990      67,500      87,009      77,382

European financing

     135,455      112,581      130,981      96,853

Netherlands financing

     10,247      8,188      6,485      6,485

Other note payable

     2,485      2,485      9,672      9,672

Singapore financing

     23,764      20,380      —        —  
                           
   $ 447,364    $ 414,906    $ 438,500    $ 373,797
                           

 

9


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Stock-Based Compensation

In March 2009, the Compensation Committee and the Stock Award Committee of the Board of Directors approved the issuance of an aggregate of 653,100 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. All awards are subject to vesting provisions. All such equity awards described in this paragraph had a total fair value as of the dates of grant of $31,797,000, which is expected to be amortized over a weighted-average period of 3.22 years.

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Cost of revenues

   $ 1,887    $ 1,257    $ 4,439    $ 3,435

Sales and marketing

     2,681      2,367      7,699      7,421

General and administrative

     9,465      8,938      26,892      31,095
                           
   $ 14,033    $ 12,562    $ 39,030    $ 41,951
                           

Goodwill and Other Intangible Assets

The Company has three reportable segments comprised of 1) the United States, 2) Asia-Pacific and 3) Europe geographic regions. As of September 30, 2009, the Company had goodwill attributable to the Asia-Pacific reporting unit and the Europe reporting unit (see “Goodwill and Other Intangibles” in Note 7). The Company performed its annual impairment review of the Europe reporting unit as of August 31, 2009 as prescribed in the accounting standard related to goodwill impairment tests. The Company concluded that its goodwill attributed to the Company’s Europe reporting unit was not impaired as the fair value of its Europe reporting unit exceeded the carrying value of this reporting unit, including goodwill. In order to determine the fair value of the Company’s reporting units, the Company utilizes the discounted cash flow and market methods. The Company has consistently utilized both methods in its goodwill impairment tests and weights both results equally. The Company uses both methods in its goodwill impairment tests as it believes both, in conjunction with each other, provide a reasonable estimate of the determination of fair value of the reporting unit – the discounted cash flow method being specific to anticipated future results of the reporting unit and the market method, which is based on the Company’s market sector including its competitors. The assumptions supporting the discounted cash flow method, including the discount rate, which was assumed to be 10.0%, were determined using the Company’s best estimates as of the date of the impairment review. The Company has performed various sensitivity analyses on certain of the assumptions used in the discounted cash flow method, such as forecasted revenues and discount rate, and notes that no reasonably possible changes would reduce the fair value of the reporting unit to such a level that would cause an impairment charge.

Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact the Company’s assumptions as to prices, costs, growth rates or other factors that may result in changes in the Company’s estimates of future cash flows. Although the Company believes the assumptions it used in testing for impairment are reasonable, significant changes in any one of the Company’s assumptions could produce a significantly different result. The Company performs its annual impairment review of the Asia-Pacific reporting unit in the fourth quarter; however, the Company has noted no indications of impairment as of September 30, 2009. Indicators of potential impairment that might lead the Company to perform interim goodwill impairment assessments include significant and unforeseen customer losses, a significant adverse change in legal factors or in the business climate, a significant adverse action or assessment by a regulator or unanticipated competition.

Recent Accounting Pronouncements

In May 2009, the FASB issued an accounting standard update, which establishes the accounting for and disclosures of subsequent events. The Company adopted this accounting standard update during the three months ended June 30, 2009. The adoption of this accounting standard update did not have material impact on the Company’s consolidated financial statements.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In June 2009, the FASB issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), which establishes the FASB Accounting Standards Codification™ as the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The Company adopted ASU 2009-01 during the three months ended September 30, 2009 and its adoption did not have any impact on the Company’s consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), which clarified how to measure the fair value of liabilities in circumstances when a quoted price in an active market for the identical liability is not available. ASU 2009-05 is effective for the first reporting period beginning after the issuance of this standard. The Company expects to adopt ASU 2009-05 during the three months ended December 31, 2009 and is evaluating the impact that this adoption will have on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-13 (“ASU 2009-13”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal years on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, if any.

2. Changes in Accounting Principle

The Company changed its accounting principles to reflect the impact of the adoption of a FASB amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) (see “2.50% Convertible Subordinated Notes” in Note 8) and a FASB amendment related to the accounting for instruments granted in share-based payment transactions that are considered participating securities prior to vesting and, therefore, should be included in the calculation of EPS (see Note 1), which were effective January 1, 2009. These FASB amendments were applied retrospectively, as a result, the Company adjusted comparative condensed consolidated financial statements of prior periods in this Quarterly Report on Form 10-Q.

The following condensed consolidated statement of operations for the three and nine months ended September 30, 2008 and condensed consolidated statement of cash flows for the nine months ended September 30, 2008 were affected by the changes in accounting principle (in thousands, except per share amounts):

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidated Statement of Operations

 

     Three Months Ended
September 30, 2008
 
     As Originally
Reported
    As Adjusted     Effect of
Change
 

Revenues

   $ 183,735      $ 183,735      $ —     
                        

Costs and operating expenses:

      

Cost of revenues

     109,863        109,905        42   

Sales and marketing

     16,009        16,009        —     

General and administrative

     35,529        35,529        —     

Restructuring charges

     799        799        —     
                        

Total costs and operating expenses

     162,200        162,242        42   
                        

Income from operations

     21,535        21,493        (42

Interest income

     1,968        1,968        —     

Interest expense

     (13,880     (15,671     (1,791

Other-than-temporary impairment loss on investments

     (1,527     (1,527     —     

Other income (expense)

     (520     (520     —     
                        

Income before income taxes

     7,576        5,743        (1,833
                        

Income tax expense

     (187     (187     —     
                        

Net income

   $ 7,389      $ 5,556      $ (1,833
                        

Earnings per share:

      

Basic earnings per share

   $ 0.20      $ 0.15      $ (0.05
                        

Diluted earnings per share

   $ 0.19      $ 0.15      $ (0.04
                        

 

     Nine Months Ended
September 30, 2008
 
     As Originally
Reported
    As Adjusted     Effect of
Change
 

Revenues

   $ 513,997      $ 513,997      $ —     
                        

Costs and operating expenses:

      

Cost of revenues

     306,357        306,453        96   

Sales and marketing

     46,650        46,650        —     

General and administrative

     111,350        111,350        —     

Restructuring charges

     799        799        —     
                        

Total costs and operating expenses

     465,156        465,252        96   
                        

Income from operations

     48,841        48,745        (96

Interest income

     7,820        7,820        —     

Interest expense

     (40,297     (45,179     (4,882

Other-than-temporary impairment loss on investments

     (1,527     (1,527     —     

Other income (expense)

     602        602        —     
                        

Income before income taxes

     15,439        10,461        (4,978
                        

Income tax expense

     (400     (400     —     
                        

Net income

   $ 15,039      $ 10,061      $ (4,978
                        

Earnings per share:

      

Basic earnings per share

   $ 0.41      $ 0.27      $ (0.14
                        

Diluted earnings per share

   $ 0.40      $ 0.27      $ (0.13
                        

As a result of the Company’s adoption of the FASB amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the most significant impact to the Company’s financial results for the three and nine months ended September 30, 2009 was an increase to interest expense of $2,526,000 and $7,465,000, respectively.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidated Statement of Cash Flows

 

     Nine Months Ended
September 30, 2008
 
     As Originally
Reported
    As Adjusted     Effect of
Change
 

Cash flows from operating activities:

      

Net income

   $ 15,039      $ 10,061      $ (4,978

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

      

Depreciation

     110,110        110,206        96   

Stock-based compensation

     41,951        41,951        —     

Amortization of intangibles

     5,236        5,236        —     

Amortization of debt issuance costs and debt discount

     3,753        8,635        4,882   

Accretion of asset retirement obligation and accrued restructuring charges

     1,245        1,245        —     

Restructuring charges

     799        799        —     

Realized net gains on investments

     (1,063     (1,063     —     

Other items

     1,348        1,348        —     

Changes in operating assets and liabilities:

      

Accounts receivable

     (3,783     (3,783     —     

Other assets

     (2,018     (2,018     —     

Accounts payable and accrued expenses

     5,015        5,015        —     

Accrued restructuring charges

     (2,034     (2,034     —     

Other liabilities

     15,665        15,665        —     
                        

Net cash provided by operating activities

     191,263        191,263        —     

Net cash used in investing activities

     (434,850     (434,850     —     

Net cash provided by financing activities

     112,950        112,950        —     

Effect of foreign currency exchange rates on cash and cash equivalents

     689        689        —     
                        

Net decrease in cash and cash equivalents

     (129,948     (129,948     —     
                        

Cash and cash equivalents at beginning of period

     290,633        290,633        —     
                        

Cash and cash equivalents at end of period

   $ 160,685      $ 160,685      $ —     
                        

3. IBX Acquisitions and Expansions

Upminster Acquisition

On July 22, 2009, a wholly-owned subsidiary of the Company acquired all of the issued and outstanding share capital of Upminster GmbH, a company which owns a data center and the real estate on which it is situated in Frankfurt, Germany, for a cash payment of $28,208,000, excluding acquisition costs (the “Upminster Acquisition”). The combined company operates under the Equinix name. The Upminster Acquisition was accounted for using the acquisition method of accounting in accordance with the accounting standard related to the accounting for business combinations. The results of operations for Upminster are not significant to the Company; therefore, the Company does not present its purchase price allocation or pro forma combined results of operations. The Company expensed its acquisition costs in connection with the Upminster Acquisition.

Chicago IBX Expansion Project

In July 2009, a wholly-owned subsidiary of the Company entered into an operating lease agreement (“the Lease”) for data center space in the Chicago metro area. The Lease has a fixed term of 12 years, with options to extend for up to an additional 15 years, in five-year increments. Cumulative minimum payments under the Lease total $92,286,000 over the initial Lease term.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Zurich IBX Expansion Project

In June 2009, an indirect wholly-owned subsidiary of the Company entered into a lease for building space within a multi-floor, multi-tenant building that the Company will convert into its fourth IBX center in Zurich, Switzerland (the “Zurich Lease” and the “Zurich IBX Expansion Project”). The Zurich Lease has a fixed term of 10 years, with options to extend for up to an additional 10 years, in five-year increments. Cumulative minimum payments under the Zurich Lease total approximately $8,727,000 (using the exchange rate as of September 30, 2009) over the Zurich Lease term, which does not include any rent obligation for the extension periods. Pursuant to the accounting standards related to the accounting for lessee’s involvement in asset construction and the accounting for leasing transactions involving special-purpose entities, the Company is considered the owner of the leased building space during the construction phase due to some specific provisions contained in the Zurich Lease. As a result, as of September 30, 2009, the Company has recorded a building asset and a related financing liability (the “Zurich IBX Building Financing”) totaling approximately $11,348,000 (using the exchange rate as of September 30, 2009).

London IBX Expansion Project

In October 2008, an indirect wholly-owned subsidiary of the Company entered into an agreement for lease for property and a warehouse building to be constructed for the Company in the London, England metro area (the “Agreement for Lease”). The Agreement for Lease provides for the completion of a warehouse building within a specified time and the entry into a definitive lease (the “Lease”) upon its completion. The Lease will have a term of 20 years, with the Company’s option to terminate after 15 years upon six months’ prior notice, and a total cumulative rent obligation of approximately $39,801,000 (using the exchange rate as of September 30, 2009) over the first 15 years of the Lease. On the fifteenth anniversary of the Lease, the rent can be reviewed and adjusted to market rents, as set out in the Lease. The Company expects to enter into the Lease in approximately February 2010. In January 2009, the landlord commenced construction of the building that the Company will ultimately lease. Pursuant to the accounting standards related to the accounting for lessee’s involvement in asset construction and the accounting for leasing transactions involving special-purpose entities, the Company is considered the owner of the building during the construction phase. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the “London IBX Building Financing”), while the underlying land will be considered an operating lease. The building is expected to be completed in February 2010. In connection with the London IBX Building Financing, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $11,280,000 (using the exchange rate as of September 30, 2009), representing the estimated percentage-of-completion of the building as of September 30, 2009.

4. Fair Value Measurements

In April 2009, the Company adopted an accounting standard update related to determining fair value when the volume and level of activity for an asset or liability have significantly decreased and identifying transactions that are not orderly. This adoption did not have any significant impact on the Company’s consolidated financial statements.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2009 were as follows (in thousands):

 

     Fair value at
September 30,
    Fair value measurement using
   2009     Level 1    Level 2     Level 3
Assets:          

U.S. Government and Agency obligations

   $ 437,076      $ —      $ 437,076      $ —  

Money markets

     166,152        166,152      —          —  

Reserve

     897        —        —          897

Corporate bonds

     14,807        —        14,807        —  

Asset-backed securities

     7,367        —        7,367        —  

Other securities

     1,143        —        1,143        —  
                             
   $ 627,442      $ 166,152    $ 460,393      $ 897
                             
Liabilities:          

Derivative liabilities (1)

     (11,833     —        (11,833     —  
                             
   $ (11,833   $ —      $ (11,833   $ —  
                             
 
  (1) Included in the condensed consolidated balance sheets within other current liabilities and other liabilities.

The following table provides a summary of the activities of the Company’s Level 3 financial assets measured at fair value for the nine months ended September 30, 2009 (in thousands):

 

Balance at December 31, 2008

   $ 9,250   

Other-than-temporary impairment loss on investments (1)

     (2,687

Settlements

     (5,666
        

Balance at September 30, 2009

   $ 897   
        
 
  (1) Included in the condensed consolidated statements of operations.

In January 2009, the Company adopted the accounting standard related to the measurement of fair value for nonfinancial assets and liabilities that are not remeasured at fair value on a recurring basis. These include:

 

   

Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent reporting periods;

 

   

Reporting units and nonfinancial assets and nonfinancial liabilities measured at fair value for goodwill impairment test under the accounting standard related to the accounting for intangibles;

 

   

Indefinite-lived intangible assets measured at fair value for impairment assessment under the accounting standard related to the accounting for intangibles;

 

   

Nonfinancial long-lived assets or asset groups measured at fair value for impairment assessment or disposal under the accounting standard related to the accounting for property, plant and equipment;

 

   

Asset retirement obligations initially measured at fair value under the accounting standard related to the accounting for asset retirement and environmental obligations; and

 

   

Nonfinancial liabilities associated with exit or disposal activities initially measured at fair value under the accounting standard related to the accounting for exit or disposal cost obligations.

During the three and nine months ended September 30, 2009, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

During the three and nine months ended September 30, 2009, there were no impairment charges recorded in connection with the Company’s goodwill and long-lived assets. The Company performs impairment tests of its goodwill at least annually (or whenever events or circumstances indicate a triggering event has occurred indicating that the carrying amount of the asset may not be recoverable). Goodwill attributed to the Company’s Europe reporting unit was tested for impairment in the third quarter of 2009 and goodwill attributed to the Company’s Asia-Pacific reporting unit is scheduled to be tested in the fourth quarter of 2009 (see Note 1). The Company performs impairment tests for its long-lived assets, other than goodwill, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the nine months ended September 30, 2009, the Company recorded new asset retirement obligations and recorded a reduction to its restructuring charge, which include measurements of fair value on a non-recurring basis; however, the amounts for both of these items were not significant.

5. Derivatives and Hedging Activities

The Company follows the accounting standard related to derivative and hedging in its accounting for derivatives and hedging activities. The Company employs interest rate swaps to partially offset its exposure to variability in interest payments due to fluctuations in interest rates for certain of its variable-rate debt. To assess effectiveness, the Company uses a regression analysis. The extent to which a hedging instrument has been and is expected to continue to be effective at achieving offsetting changes in cash flows is assessed and documented at least quarterly. Any ineffectiveness is reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged cash flows affect earnings. The ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge relationship is terminated, then the change in fair value of the derivative recorded in other comprehensive income (loss) is recognized in earnings when the cash flows that were hedged occur, consistent with the original hedge strategy. For hedge relationships discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related derivative amounts recorded in other comprehensive income (loss) are immediately recognized in earnings. The Company has no fair value hedges. The Company does not use derivatives for speculative or trading purposes. The Company employs foreign currency forward contracts to partially offset its business exposure to foreign exchange risk for certain existing foreign currency-denominated assets and liabilities.

Cash Flow Hedges–Interest Rate Swaps

The Company has variable-rate debt financing. These obligations expose the Company to variability in interest payments and therefore fluctuations in interest expense and cash flows due to changes in interest rates. Interest rate swap contracts are used in the Company’s risk management activities in order to minimize significant fluctuations in earnings that are caused by interest rate volatility. Interest rate swaps involve the exchange of variable-rate interest payments for fixed-rate interest payments based on the contractual underlying notional amount. Gains and losses on the interest rate swaps that are linked to the debt being hedged are expected to substantially offset this variability in earnings.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As of September 30, 2009, the Company had a total of four outstanding interest rate swap instruments with expiration dates ranging from February 2011 to May 2011 as follows (in thousands):

 

     Notional
Amount
   Fair
Value (1)
    Loss (2)  

Liabilities:

       

European Financing interest rate swaps

   $ 89,265    $ (5,899   $ (5,814

Chicago IBX Financing interest rate swap

     105,000      (4,004     (4,004
                       
   $ 194,265    $ (9,903   $ (9,818
                       
 
  (1) Included in the condensed consolidated balance sheets within other liabilities.
  (2) Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).

As of September 30, 2008, the Company had six interest rate swap instruments with expiration dates ranging from August 2009 to May 2011 as follows (in thousands):

 

     Notional
Amount
   Fair
Value (1)
    Gain
(Loss) (2)
 

Liabilities:

       

European Financing interest rate swaps

     113,710      (1,602     (1,832

Chicago IBX Financing interest rate swap

     105,000      (513     (513
                       
   $ 218,710    $ (2,115   $ (2,345
                       
 
  (1) Included in the condensed consolidated balance sheets within other current liabilities and other liabilities.
  (2) Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).

The Company designated all existing interest rate swaps as highly effective hedge relationships at achieving offsetting changes in cash flows as of September 30, 2009 and 2008 with an insignificant amount of ineffectiveness recorded in interest expense on the accompanying condensed consolidated statements of operations.

Other Derivatives–Foreign Currency Forward Contracts

The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the foreign currency-denominated assets and liabilities change. Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date.

The Company has not designated the foreign currency forward contracts as hedging instruments under the accounting standard related to the accounting for derivative and hedging. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and nine months ended September 30, 2009. As of September 30, 2009, the Company had gross assets totaling $1,238,000 and gross liabilities totaling $3,168,000 representing the fair values of these foreign currency forward contracts. The Company records its foreign currency forward contracts, net, within other current liabilities. During the three and nine months ended September 30, 2009, the Company recognized a net loss of $820,000 and $1,156,000, respectively, in connection with its foreign currency forward contracts, which is reflected in other income (expense) on the accompanying consolidated statement of operations. During the three and nine months ended September 30, 2008, the Company recognized a net gain of $3,181,000 and $2,944,000, respectively, in connection with its foreign currency forward contracts, which is reflected in other income (expense) on the accompanying consolidated statement of operations.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

6. Related Party Transactions

The Company has several significant stockholders and other related parties that are also customers and/or vendors. For the three and nine months ended September 30, 2009, revenues recognized from related parties were $5,654,000 and $17,308,000, respectively. For the three and nine months ended September 30, 2008, revenues recognized from related parties were $6,662,000 and $14,266,000, respectively. As of September 30, 2009 and 2008, accounts receivable with these related parties were $3,070,000 and $5,386,000, respectively. For the three and nine months ended September 30, 2009, costs and services procured from related parties were $489,000 and $788,000, respectively. For the three and nine months ended September 30, 2008, costs and services procured from related parties were $735,000 and $2,250,000, respectively. As of September 30, 2009 and 2008, accounts payable with these related parties were $43,000 and $87,000, respectively.

7. Balance Sheet Components

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

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

 

     September 30, 2009  
     Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

U.S. Government and Agency obligations

   $ 436,831      $ 249      $ (4   $ 437,076   

Money markets

     166,152        —          —          166,152   

Reserve

     897        —          —          897   

Corporate bonds

     14,531        276        —          14,807   

Asset-backed securities

     7,203        169        (5     7,367   

Other securities

     1,131        12        —          1,143   
                                

Total available-for-sale securities

     626,745        706        (9     627,442   

Less amounts classified as cash and cash equivalents

     (283,144     (3     —          (283,147
                                

Total securities classified as investments

     343,601        703        (9     344,295   

Less amounts classified as short-term investments

     (325,977     (261     4        (326,234
                                

Total long-term investments

   $ 17,624      $ 442      $ (5   $ 18,061   
                                

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     December 31, 2008  
     Amortized
Cost
    Gross
Unrealized
Gains
    Gross
Unrealized
Losses
    Fair Value  

U.S. Government and Agency obligations

   $ 130,672      $ 344      $ (14   $ 131,002   

Money markets

     112,208        —          —          112,208   

Reserve

     9,250        —          —          9,250   

Corporate bonds

     35,046        35        (546     34,535   

Asset-backed securities

     17,970        53        (299     17,724   

Certificates of deposits

     2,000        5        —          2,005   

Other securities

     1,199        22        —          1,221   
                                

Total available-for-sale securities

     308,345        459        (859     307,945   

Less amounts classified as cash and cash equivalents

     (220,207     —          —          (220,207
                                

Total securities classified as investments

     88,138        459        (859     87,738   

Less amounts classified as short-term investments

     (42,132     (135     155        (42,112
                                

Total long-term investments

   $ 46,006      $ 324      $ (704   $ 45,626   
                                

As of September 30, 2009 and December 31, 2008, cash equivalents included investments which were readily convertible to cash and had maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of September 30, 2009 and December 31, 2008. The maturities of securities classified as long-term investments were greater than one year and less than three years as of September 30, 2009 and December 31, 2008.

Effective April 1, 2009, the Company adopted an accounting standard update related to the recognition and disclosure of other-than-temporary impairments of investments. As a result of this adoption, the Company reclassified previously-recorded other-than-temporary impairment losses in connection with its investment in the Reserve Primary Fund (the “Reserve”) from other income (expense), net, to other-than-temporary impairment loss on investments in the Company’s accompanying condensed consolidated statements of operations. During the nine months ended September 30, 2009, the Company received additional distributions of $5,666,000 from the Reserve. During the nine months ended September 30, 2009, the Company recorded an additional $2,687,000 of other-than-temporary impairment loss in connection with its investments in the Reserve, which is included in the Company’s accompanying condensed consolidated statements of operations. During the three months ended September 30, 2008, the Company recorded a $1,527,000 other-than-temporary impairment loss from the Reserve. The other-than-temporary impairment losses that the Company recorded in 2008 and 2009 as described above were entirely credit losses with nothing required to be reclassified from earnings to accumulated other comprehensive income (loss) for non-credit portions in either period. As of September 30, 2009, funds held by the Reserve with a fair value totaling $897,000 remained outstanding and are classified as a short-term investment on the Company’s accompanying condensed consolidated balance sheets. This classification is based on the Company’s assessment of each of the individual securities which make up the underlying portfolio holdings in the Reserve, which primarily consisted of commercial paper, certificates of deposits and discount notes. While the Company expects to receive substantially all of its current holdings in the Reserve within the next nine months, it is possible the Company may encounter difficulties in receiving distributions given the current credit market conditions. If market conditions were to deteriorate even further such that the current fair value was not achievable, or if the Reserve is delayed in its ability to accurately complete their account reconciliations, the Company could realize additional losses in its holdings with the Reserve and distributions could be further delayed. A number of litigation claims have been filed against the Reserve’s management which could potentially delay the timing and amount of the final distributions of the fund. If the litigation were to continue for an extended period of time it is possible that the Reserve management’s cost of defending these claims could also reduce the final amount of distribution to the Company.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table summarizes the fair value and gross unrealized losses related to six available-for-sale securities with an aggregate cost basis of $130,691,000, aggregated by type of investment and length of time that individual securities have been in continuous unrealized loss position, as of September 30, 2009 (in thousands):

 

     Securities in a loss
position for less than 12
months
    Securities in a loss
position for 12 months
or more
     Fair value    Gross
unrealized
losses
    Fair value    Gross
unrealized
losses

U.S. Government and Agency obligations

   $ 129,954    $ (4   $ —      $ —  

Asset-backed securities

     728      (5     —        —  
                            
   $ 130,682    $ (9   $ —      $ —  
                            

The Company does not believe it holds investments that are other-than-temporarily impaired, other than its investment in the Reserve, and believes that the Company’s investments will mature at par, as of September 30, 2009. As securities mature and additional proceeds become available for investing, the Company invests these proceeds in U.S. government securities, such as Treasury bills and Treasury notes, of a short-term duration and lower yield in order to meet its liquidity and lower risk requirements in this current market environment. As a result, the Company expects interest income to remain at low levels in future periods.

Accounts Receivable

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

 

     September 30,
2009
    December 31,
2008
 

Accounts receivable

   $ 127,868      $ 119,030   

Unearned revenue

     (58,843     (50,964

Allowance for doubtful accounts

     (1,436     (2,037
                
   $ 67,589      $ 66,029   
                

Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The Company generally invoices its customers at the end of a calendar month for services to be provided the following month. Accordingly, unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers in advance in accordance with the terms of their contract.

Other Current Assets

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

 

     September 30,
2009
   December 31,
2008

Prepaid expenses

   $ 13,080    $ 9,550

Taxes receivable

     4,981      3,434

Foreign currency forward contract receivable

     —        377

Debt issuance costs, net

     —        18

Other receivable

     2,177      1,280

Other current assets

     1,723      568
             
   $ 21,961    $ 15,227
             

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Property, Plant and Equipment

Property, plant and equipment consisted of the following (in thousands):

 

     September 30,
2009
    December 31,
2008
 

IBX plant and machinery

   $ 903,624      $ 651,820   

Leasehold improvements

     536,674        472,872   

Buildings

     277,911        196,009   

Site improvements

     231,747        217,200   

IBX equipment

     168,250        147,832   

Land

     85,022        48,950   

Computer equipment and software

     80,673        74,179   

Furniture and fixtures

     10,899        9,866   

Construction in progress

     147,472        277,208   
                
     2,442,272        2,095,936   

Less accumulated depreciation

     (739,263     (603,106
                
   $ 1,703,009      $ 1,492,830   
                

Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated $81,596,000 and $80,239,000 at September 30, 2009 and December 31, 2008, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $14,644,000 and $10,407,000 as of September 30, 2009 and 2008, respectively.

As of September 30, 2009 and December 31, 2008, the Company had accrued property, plant and equipment expenditures of $64,598,000 and $89,518,000, respectively. The Company’s planned capital expenditures during the remainder of 2009 in connection with recently acquired IBX properties and expansion efforts are substantial. For further information, refer to “Other Purchase Commitments” in Note 9.

During the three months ended September 30, 2009, the Company changed the estimated useful lives of certain of the Company’s property, plant and equipment, which is accounted for as a change in accounting estimate (see “Property, Plant and Equipment” in Note 1).

Goodwill and Other Intangible Assets

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

 

     September 30,
2009
    December 31,
2008
 

Goodwill:

    

Europe

   $ 359,140      $ 324,674   

Asia-Pacific

     18,416        18,155   
                
     377,556        342,829   
                

Other intangibles:

    

Intangible asset – customer contracts

     63,489        58,605   

Intangible asset – leases

     4,655        4,349   

Intangible asset – others

     1,631        755   
                
     69,775        63,709   

Accumulated amortization

     (17,713     (12,791
                
     52,062        50,918   
                
   $ 429,618      $ 393,747   
                

 

21


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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company’s goodwill and intangible assets in Europe, denominated in British pounds and Euros, and goodwill in Asia-Pacific, denominated in Singapore dollars, are subject to foreign currency fluctuations. The changes in goodwill balances noted above are predominantly due to foreign exchange rate changes; however, the Company also recorded $4,403,000 of additional goodwill to the Europe reporting unit in connection with the Upminster Acquisition (see Note 3). The Company’s foreign currency translation gains and losses, including those related to goodwill and other intangibles, are a component of other comprehensive income (loss).

For the three and nine months ended September 30, 2009, the Company recorded amortization expense of $1,454,000 and $4,100,000, respectively, associated with its other intangible assets. For the three and nine months ended September 30, 2008, the Company recorded amortization expense of $1,690,000 and $5,236,000, respectively, associated with its other intangible assets. Estimated future amortization expense related to these intangibles is as follows (in thousands):

 

Year ending:

  

2009 (three months remaining)

   $ 1,495

2010

     5,763

2011

     5,669

2012

     5,653

2013

     5,653

2014 and thereafter

     27,829
      

Total

   $ 52,062
      

Other Assets

Other assets consisted of the following (in thousands):

 

     September 30,
2009
   December 31,
2008

Deposits

   $ 25,170    $ 21,485

Debt issuance costs, net

     20,994      16,216

Prepaid expenses

     3,364      3,874

Restricted cash

     3,211      14,934

Other assets

     1,119      1,285
             
   $ 53,858    $ 57,794
             

Accounts Payable and Accrued Expenses

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

 

     September 30,
2009
   December 31,
2008

Accounts payable

   $ 18,222    $ 18,325

Accrued compensation and benefits

     27,469      22,135

Accrued taxes

     16,886      8,640

Accrued utilities and security

     15,494      10,327

Accrued interest

     15,405      5,962

Accrued professional fees

     2,959      2,741

Accrued other

     7,853      6,187
             
   $ 104,288    $ 74,317
             

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Other Current Liabilities

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

 

     September 30,
2009
   December 31,
2008

Deferred installation revenue

   $ 26,962    $ 22,769

Deferred tax liabilities

     7,342      7,342

Customer deposits

     8,032      5,913

Deferred recurring revenue

     4,695      4,434

Accrued restructuring charges

     1,967      6,023

Foreign currency forward contract payable

     1,930      2,072

Deferred rent

     403      495

Interest rate swap payable

     —        271

Other current liabilities

     496      1,136
             
   $ 51,827    $ 50,455
             

Other Liabilities

Other liabilities consisted of the following (in thousands):

 

     September 30,
2009
   December 31,
2008

Deferred rent, non-current

   $ 32,535    $ 28,146

Deferred tax liabilities, non-current

     17,616      16,531

Asset retirement obligations

     17,791      12,264

Deferred installation revenue, non-current

     16,851      12,083

Interest rate swap payable, non-current

     9,903      10,631

Customer deposits, non-current

     5,472      6,108

Deferred recurring revenue, non-current

     5,576      6,180

Accrued restructuring charges, non-current

     4,271      7,288

Other liabilities

     1,162      864
             
   $ 111,177    $ 100,095
             

The Company currently leases the majority of its IBX centers and certain equipment under non-cancelable operating lease agreements expiring through 2027. The IBX center lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated rent expense abatement periods to better match the phased build-out of its centers. The Company accounts for such abatements and increasing base rents using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.

8. Debt Facilities and Other Financing Obligations

4.75% Convertible Subordinated Notes

In June 2009, the Company issued $373,750,000 aggregate principal amount of 4.75% Convertible Subordinated Notes due June 15, 2016 (the “4.75% Convertible Subordinated Notes”). Interest is payable semi-annually on June 15 and December 15 of each year, beginning December 15, 2009.

The 4.75% Convertible Subordinated Notes are governed by an Indenture dated as of June 12, 2009, between the Company, as issuer, and U.S. Bank National Association, as trustee (the “4.75% Convertible Subordinated Notes Indenture”). The 4.75% Convertible Subordinated Notes Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The 4.75% Convertible Subordinated Notes are unsecured and rank junior in right of payment to the Company’s existing or future senior debt and equal in right of payment to the Company’s existing and future subordinated debt.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Upon conversion, holders will receive, at the Company’s election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. However, the Company may at any time irrevocably elect for the remaining term of the 4.75% Convertible Subordinated Notes to satisfy its obligation in cash up to 100% of the principal amount of the 4.75% Convertible Subordinated Notes, with any remaining amount to be satisfied, at the Company’s election, in shares of its common stock or a combination of cash and shares of its common stock.

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

 

   

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

 

   

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

 

   

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

 

   

at any time on or after March 15, 2016.

Upon conversion, if the Company elected to pay a sufficiently large portion of the conversion obligation in cash, additional consideration beyond the $373,750,000 of gross proceeds received would be required. As of September 30, 2009, the 4.75% Convertible Subordinated Notes were convertible into 4,432,638 shares of the Company’s common stock.

The conversion rates may be adjusted upon the occurrence of certain events, including for any cash dividend, but they will not be adjusted for accrued and unpaid interest. Holders of the 4.75% Convertible Subordinated Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited.

The Company does not have the right to redeem the 4.75% Convertible Subordinated Notes at its option. Holders of the 4.75% Convertible Subordinated Notes have the right to require the Company to purchase with cash all or a portion of the 4.75% Convertible Subordinated Notes upon the occurrence of a fundamental change, such as a change of control at a purchase price equal to 100% of the principal amount of the 4.75% Convertible Subordinated Notes plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 4.75% Convertible Subordinated Notes in connection with such change of control in certain circumstances.

 

24


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Under a FASB amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company separated the 4.75% Convertible Subordinated Notes into a liability component and an equity component. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 4.75% Convertible Subordinated Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification as prescribed in the accounting standard related to the accounting for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard related to the accounting for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.

Issuance and transaction costs incurred at the time of the issuance of the 4.75% Convertible Subordinated Notes with third parties are allocated to the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively. Debt issuance costs related to the 4.75% Convertible Subordinated Notes, net of amortization, were $6,862,000 as of September 30, 2009 and equity issuance costs were $2,796,000. Additionally, the Company recorded a deferred tax liability of $21,998,000 in connection with the 4.75% Convertible Subordinated Notes and the Capped Call (see below). The 4.75% Convertible Subordinated Notes consisted of the following (in thousands):

 

     September 30,
2009
 

Equity component (1)

   $ 104,794   
        

Liability component :

  

Principal

   $ 373,750   

Less: debt discount, net (2)

     (101,619
        

Net carrying amount

   $ 272,131   
        
 
  (1) Included in the condensed consolidated balance sheets within additional paid-in capital.
  (2) Included in the condensed consolidated balance sheets within convertible debt and is amortized over the remaining life of the 4.75% Convertible Subordinated Notes.

As of September 30, 2009, the remaining life of the 4.75% Convertible Subordinated Notes was 6.7 years.

The following table sets forth total interest expense recognized related to the 4.75% Convertible Subordinated Notes (in thousands):

 

     Three months
ended
September 30,
2009
    Nine months
ended
September 30,
2009
 

Contractual interest expense

   $ 4,438      $ 5,375   

Amortization of debt issuance costs

     259        314   

Amortization of debt discount

     2,622        3,175   
                
   $ 7,319      $ 8,864   
                

Effective interest rate of the liability component

     10.88     10.88

 

25


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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. 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. Depending upon the Company’s stock price at the time the 4.75% Convertible Subordinated Notes are converted, the Capped Call will return up to 1,177,456 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 $84.32 or lower at the time of conversion and will receive less shares for share prices in excess of $114.82 at the time of conversion than it would have received at a share price of $114.82 (the Company’s benefit from the Capped Call is capped at $114.82 and no additional benefit is received beyond this price). In connection with the Capped Call, the Company recorded a $19,000 derivative loss in its statement of operations for the nine months ended September 30, 2009, and the remaining $49,645,000 was recorded in additional paid-in capital pursuant to the accounting standard related to the accounting for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard related to the accounting for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.

2.50% Convertible Subordinated Notes

In January 2009, the Company adopted a FASB amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). This FASB amendment specifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The Company’s 2.50% Convertible Subordinated Notes fall within the scope of this FASB amendment due to the Company’s ability to elect to repay the 2.50% Convertible Subordinated Notes in cash. This FASB amendment did not impact the Company’s other convertible debt instruments that were outstanding as of January 1, 2009. This accounting standard was applied retrospectively. As a result, the Company adjusted its previously issued comparative condensed consolidated financial statements (see Note 2).

In March 2007, the Company issued $250,000,000 aggregate principal amount of 2.50% Convertible Subordinated Notes due April 15, 2012 (the “2.50% Convertible Subordinated Notes”). Interest is payable semi-annually on April 15 and October 15 of each year, and commenced October 15, 2007. Upon conversion, holders will receive, at the Company’s election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. However, the Company may at any time irrevocably elect for the remaining term of the 2.50% Convertible Subordinated Notes to satisfy its obligation in cash up to 100% of the principal amount of the 2.50% Convertible Subordinated Notes converted, with any remaining amount to be satisfied, at the Company’s election, in shares of its common stock or a combination of cash and shares of its common stock. The 2.50% Convertible Subordinated Notes have an initial conversion rate of 8.9259 shares of common stock per $1,000 principal amount of 2.50% Convertible Subordinated Notes, subject to adjustment. This represents an initial conversion price of approximately $112.03 per share of common stock. As of September 30, 2009, the 2.50% Convertible Subordinated Notes were convertible into 2,231,475 shares of the Company’s common stock.

The Company has determined that the embedded conversion option in the 2.50% Convertible Subordinated Notes is not required to be separately accounted for as a derivative under the accounting standard related to the accounting for derivative and hedging. Under the FASB amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company separated the 2.50% Convertible Subordinated Notes into a liability component and an equity component. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 2.50% Convertible Subordinated Notes as a whole.

 

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Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification as prescribed in the accounting standard related to the accounting for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard related to the accounting for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock.

Issuance and transaction costs incurred at the time of the issuance of the 2.50% Convertible Subordinated Notes with third parties are allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. The 2.50% Convertible Subordinated Notes consisted of the following (in thousands):

 

     September 30,
2009
    December 31,
2008
 

Equity component (1)

   $ 53,991      $ 53,991   
                

Liability component :

    

Principal

   $ 250,000      $ 250,000   

Less: debt discount, net (2)

     (29,753     (37,476
                

Net carrying amount

   $ 220,247      $ 212,524   
                
 
  (1) Included in the condensed consolidated balance sheets within additional paid-in capital.
  (2) Included in the condensed consolidated balance sheets within convertible debt and is amortized over the remaining life of the 2.50% Convertible Subordinated Notes.

As of September 30, 2009, the remaining life of the 2.50% Convertible Subordinated Notes was 2.54 years.

The following table sets forth total interest expense recognized related to the 2.50% Convertible Subordinated Notes (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2009     2008     2009     2008  

Contractual interest expense

   $ 1,563      $ 1,563      $ 4,688      $ 4,688   

Amortization of debt issuance costs

     311        313        934        940   

Amortization of debt discount

     2,612        2,421        7,722        7,157   
                                
   $ 4,486      $ 4,297      $ 13,344      $ 12,785   
                                

Effective interest rate of the liability component

     8.37     8.37     8.37     8.37

Singapore Financing

In September 2009, a wholly-owned subsidiary of the Company located in Singapore entered into a 37,000,000 Singapore dollar, or approximately $26,247,000 (using the exchange rate as of September 30, 2009) credit facility agreement (the “Singapore Financing”). The Singapore Financing is comprised of two tranches: (i) Facility A, which is available for drawing upon through March 18, 2010, provides a term loan of up to 34,500,000 Singapore dollars and (ii) Facility B, which is available for drawing upon through September 12, 2010, provides a term loan of up to 2,500,000 Singapore dollars (collectively, the “Loans Payable”). The Loans Payable under the Singapore Financing bear interest at a floating rate (Swap Offer Rate plus 3.65% per annum). Facility A will be repaid in nine semi-annual installments beginning in August 2010 and Facility B will be repaid in eight semi-annual installments beginning in February 2011. The Singapore Financing has a final maturity date of August 31, 2014 and interest is payable in periods of one,

 

27


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

three or six months at the election of the Company’s Singaporean subsidiary. The Singapore Financing is guaranteed by the parent, Equinix, and is secured by the assets of the Company’s second IBX center in Singapore. The Singapore Financing has several financial covenants specific to the Company’s operations in Singapore, with which the Company must comply periodically. As of September 30, 2009, the Company had borrowings under the Facility A tranche of 33,500,000 Singapore dollars, or approximately $23,764,000, at an approximate interest rate per annum of 4.15%, leaving 3,500,000 Singapore dollars, or approximately $2,483,000, available for future borrowings under the Singapore Financing.

Bank of America Revolving Credit Line

In February 2009, the Company and one of its wholly-owned subsidiaries, as co-borrower, entered into a $25,000,000 one-year revolving credit facility with Bank of America (the “Bank of America Revolving Credit Line”). The Bank of America Revolving Credit Line will be used primarily to fund the Company’s working capital and to enable the Company to issue letters of credit. The effect of issuing letters of credit under the Bank of America Revolving Credit Line will be to reduce the amount available for borrowing under the Bank of America Revolving Credit Line. The Company may borrow, repay and reborrow under the Bank of America Revolving Credit Line at either the prime rate or at a borrowing margin of 2.75% over one, three or six month LIBOR, subject to a minimum borrowing cost of 3.00%. The Bank of America Revolving Credit Line contains three financial covenants, which the Company must comply with quarterly, consisting of a tangible net worth ratio, a debt service ratio and a senior leverage ratio and is collateralized by the Company’s domestic accounts receivable balances. As of September 30, 2009, the Company was in compliance with all financial covenants in connection with the Bank of America Revolving Credit Line. The Bank of America Revolving Credit Line is available for renewal subject to mutual agreement by both parties. During the nine months ended September 30, 2009, the Company issued nine irrevocable letters of credit totaling $14,717,000 under the Bank of America Revolving Credit Line, which resulted in the release of restricted cash (see “Other Assets” in Note 7). As a result, the amount available to borrow was $10,283,000 as of September 30, 2009.

Convertible Subordinated Debentures

In June 2009, the Company entered into agreements with the holders of the remaining $19,150,000 of the Convertible Subordinated Debentures to exchange an aggregate of 484,809 newly issued shares of the Company’s common stock to settle the Convertible Subordinated Debentures. The number of shares of common stock issued equals the amount issuable upon conversion of the Convertible Subordinated Debentures in accordance with their original terms. As of September 30, 2009, there were no Convertible Subordinated Debentures outstanding.

Netherlands Financing

In June 2009, the Company’s wholly-owned subsidiary in the Netherlands amended senior credit facilities totaling approximately 5,500,000 Euros (“the Netherlands Financing”), which were assumed as a result of the Virtu Acquisition, by entering into a 7,000,000 Euro term loan to replace the previously outstanding senior credit facilities. The Netherlands Financing contains several financial covenants, which the Company must comply with annually, is guaranteed by the Company and is collateralized by substantially all of the Company’s operations in the Netherlands. The Netherlands Financing has a final maturity date of June 30, 2016 with repayment to occur over the remaining seven years in 28 equal quarterly installments starting September 30, 2009. The Netherlands Financing bears interest at a floating rate (three month EURIBOR plus 3.60% per annum). As of September 30, 2009, a total of 7,000,000 Euros, or approximately $10,247,000, was outstanding under the Netherlands Financing.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Maturities

Combined aggregate maturities for the Company’s various debt facilities and other financing obligations as of September 30, 2009 were as follows (in thousands):

 

     Convertible
debt (1)
    Mortgage
and loans
payable (1)
    Capital lease
and other
financing
obligations (2)
    Total  

2009 (three months remaining)

   $ —        $ 16,412      $ 4,317      $ 20,729   

2010

     —          53,865        17,596        71,461   

2011

     —          56,532        19,605        76,137   

2012

     250,000        145,972  (3)      19,486        415,458   

2013

     —          36,651        19,587        56,238   

2014 and thereafter

     769,736        137,932        182,801        1,090,469   
                                
     1,019,736        447,364        263,392        1,730,492   

Less amount representing interest

     —          —          (124,852     (124,852

Less amount representing debt discount

     (131,372     —          —          (131,372

Less amount representing remaining estimated building costs

     —          —          (4,640     (4,640

Plus amount representing residual property value

     —          —          26,626        26,626   
                                
     888,364        447,364        160,526        1,496,254   

Less current portion of principal

     —          (53,101     (6,347     (59,448
                                
   $ 888,364      $ 394,263      $ 154,179      $ 1,436,806   
                                
 
  (1) Represents principal only.
  (2) Represents principal and interest in accordance with minimum lease payments.
  (3) The loan payable under the Chicago IBX Financing has an initial maturity date of January 31, 2010, with options to extend for up to an additional two years, in one-year increments, upon satisfaction of certain extension conditions. The Company intends to exercise such extensions.

9. Commitments and Contingencies

Legal Matters

On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors (the “Individual Defendants”), and several investment banks that were underwriters of the Company’s initial public offering (the “Underwriter Defendants”). The cases were filed in the United States District Court for the Southern District of New York. Similar lawsuits were filed against approximately 300 other issuers and related parties. These lawsuits have been coordinated before a single judge. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against the Company and the Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege that the Underwriter Defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for the Company’s initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. On February 19, 2003, the court dismissed the Section 10(b) claim against the Company, but denied the motion to dismiss the Section 11 claim.

The parties in the approximately 300 coordinated cases, including the Company, the Underwriter Defendants in the Company class action lawsuit, and the plaintiff class in the Company class action lawsuit, reached a settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On October 6, 2009, the Court granted final approval to the settlement. The time to appeal the final approval decision will run on November 5, 2009. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

the matter. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on our results of operations, financial condition or cash flows. The Company intends to continue to defend the action vigorously if the settlement is appealed and does not survive the appeal.

On August 22, 2008, a complaint was filed against the Company, certain former officers and directors of Pihana Pacific, Inc. (“Pihana”), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawaii, and arises out of December 2002 agreements pursuant to which the Company merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the internet exchange services business of the Company. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana’s majority shareholders, officers and directors, with the alleged assistance of the Company and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly “believe may be all or a substantial portion of the approximately $725,000,000 value of the Company held by Defendants” (a group that includes more than 30 individuals and entities). An amended complaint, which adds new plaintiffs (other alleged holders of Pihana common stock) but is otherwise substantially similar to the original pleading, was filed on September 29, 2008 (the “Amended Complaint”). On October 13, 2008, a complaint was filed in a separate action by another purported holder of Pihana common stock, naming the same defendants and asserting substantially similar allegations as the August 22, 2008 and September 29, 2008 pleadings. On December 12, 2008, the court entered a stipulated order, which consolidated the two actions under one case number and set January 22, 2009 as the last day for Defendants to move to dismiss or otherwise respond to the Amended Complaint, the operative complaint in this case. On January 22, 2009, motions to dismiss the Amended Complaint were filed by the Company and other Defendants. On April 24, 2009, plaintiffs filed a Second Amended Complaint (“SAC”) to correct the naming of certain parties. The SAC is otherwise substantively identical to the Amended Complaint, and all motions to dismiss the Amended Complaint have been treated as responsive to the SAC. On September 1, 2009, the Court heard Defendants’ motions to dismiss the SAC and ruled at the hearing that all claims against all Defendants are time-barred. The Court also considered whether there were further independent grounds for dismissing the claims, and supplemental briefing has been submitted with respect to claims against one defendant. The Court has not yet entered a final Order on the motions to dismiss. The Company believes that plaintiffs’ claims and alleged damages are without merit and it intends to defend the litigation vigorously.

Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows.

The Company believes that while an unfavorable outcome to these litigation matters described above is reasonably possible, a range of potential loss cannot be determined at this time. As a result, the Company has not accrued for any amounts in connection with these legal matters as of September 30, 2009. The Company and its officers and directors intend to continue to defend the actions vigorously.

Other Purchase Commitments

Primarily as a result of the Company’s various IBX expansion projects, as of September 30, 2009, the Company was contractually committed for $60,427,000 of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, in connection with the work necessary to open these IBX centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of September 30, 2009, such as commitments to purchase power in select locations, primarily in the U.S., Australia, Germany, Singapore and the United Kingdom, through the remainder of 2009 and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of 2009 and thereafter. Such other miscellaneous purchase commitments totaled $86,302,000 as of September 30, 2009.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

10. Other Comprehensive Income and Loss

The components of other comprehensive income (loss) are as follows (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2009     2008     2009    2008  

Net income

   $ 18,812      $ 5,556      $ 51,709    $ 10,061   

Unrealized gain (loss) on available for sale securities, net of tax of $56, $0, $462 and $0, respectively

     78        (717     635      (964

Unrealized gain (loss) on interest rate swaps, net of tax of $161, $0, $532 and $0, respectively

     221        (3,584     660      (2,345

Foreign currency translation gain (loss)

     (5,665     (64,097     52,618      (57,361
                               

Comprehensive income (loss)

   $ 13,446      $ (62,842   $ 105,622    $ (50,609
                               

Changes in foreign currencies, particularly the British pound and Euro, can have a significant impact to the Company’s consolidated balance sheets (as evidenced above in the Company’s foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies are generally translating into more U.S. dollars when the U.S. dollar weakens or less U.S. dollars when the U.S. dollar strengthens.

11. Segment Information

While the Company has a single line of business, which is the design, build-out and operation of network-neutral IBX centers, it has determined that it has three reportable segments comprised of its U.S., Europe 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 geographic regions.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company provides the following segment disclosures as follows (in thousands):

 

     Three months ended
September 30,
   Nine months ended
September 30,
 
     2009     2008    2009     2008  

Total revenues:

         

United States

   $ 136,334      $ 114,859    $ 390,974      $ 321,302   

Europe

     60,806        47,297      163,662        132,339   

Asia-Pacific

     30,418        21,579      85,321        60,356   
                               
   $ 227,558      $ 183,735    $ 639,957      $ 513,997   
                               

Total depreciation and amortization:

         

United States

   $ 25,473      $ 26,940    $ 78,317      $ 74,083   

Europe

     13,471        10,340      34,239        29,061   

Asia-Pacific

     5,547        4,355      18,502        12,298   
                               
   $ 44,491      $ 41,635    $ 131,058      $ 115,442   
                               

Income from operations:

         

United States

   $ 31,571      $ 16,210    $ 94,260      $ 44,744   

Europe

     7,095        3,164      20,408        69   

Asia-Pacific

     6,892        2,119      15,625        3,932   
                               
   $ 45,558      $ 21,493    $ 130,293      $ 48,745   
                               

Capital expenditures:

         

United States

   $ 32,865      $ 36,971    $ 103,216      $ 129,852   

Europe

     68,109 (1)      25,453      114,623 (1)      123,703 (2) 

Asia-Pacific

     15,857        33,021      50,777        75,232   
                               
   $ 116,831      $ 95,445    $ 268,616      $ 328,787   
                               

 

(1) Includes the purchase price for the Upminster Acquisition, net of cash acquired, which totaled $28,176,000.
(2) Includes the purchase price for the Virtu Acquisition, net of cash acquired, which totaled $23,241,000.

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

 

     September 30,
2009
   December 31,
2008

United States

   $ 1,073,221    $ 1,043,504

Europe

     446,787      309,655

Asia-Pacific

     183,001      139,671
             
   $ 1,703,009    $ 1,492,830
             

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2009    2008    2009    2008

Colocation

   $ 183,784    $ 141,938    $ 514,042    $ 396,261

Interconnection

     27,235      24,115      78,566      68,478

Managed infrastructure

     7,020      7,210      21,528      21,720

Rental

     295      254      798      812
                           

Recurring revenues

     218,334      173,517      614,934      487,271

Non-recurring revenues

     9,224      10,218      25,023      26,726
                           
   $ 227,558    $ 183,735    $ 639,957    $ 513,997
                           

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

No single customer accounted for 10% or greater of the Company’s revenues for the three and nine months ended September 30, 2009 and 2008. No single customer accounted for 10% or greater of the Company’s gross accounts receivable as of September 30, 2009 and December 31, 2008.

12. Restructuring Charges

In February 2009, the Company decided to utilize space it previously abandoned in order to expand its original Los Angeles IBX center. Accordingly, the Company reversed $5,833,000 of accrued restructuring charges associated with a Los Angeles lease during the three months ended March 31, 2009. The Company’s excess space in the New York metro area remains abandoned and continues to be an accrued restructuring charge. During the three months ended June 30, 2009, the Company recorded a reduction to the restructuring charge of $220,000 in connection with its excess space in the New York metro area as a result of revised sublease assumptions.

A summary of the movement in the Company’s accrued restructuring charges from December 31, 2008 to September 30, 2009 is outlined as follows (in thousands):

 

     Accrued
restructuring
charge as of
December 31,
2008
    Accretion
expense
   Restructuring
charge
adjustment
    Cash
payments
    Accrued
restructuring
charge as of
September 30,
2009
 

Estimated lease exit costs

   $ 13,311      $ 339    $ (6,053   $ (1,359   $ 6,238   
                                       
     13,311      $ 339    $ (6,053   $ (1,359     6,238   
                           

Less current portion

     (6,023            (1,967
                       
   $ 7,288             $ 4,271   
                       

As the Company currently has no plans to enter into a lease termination with the landlord associated with the excess space lease in the New York metro area, the Company has reflected its accrued restructuring liability as both a current and non-current liability. The Company reports accrued restructuring charges within other current liabilities and other liabilities on the accompanying condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008. The Company is contractually committed to this excess space lease through 2015.

13. Subsequent Events

In October 2009, the Company announced that it had entered into an agreement with Switch & Data Facilities Company, Inc. (“Switch and Data”) under which the Company will acquire Switch and Data (“the Switch and Data Acquisition”). Under the terms of the Switch and Data Acquisition, Switch and Data stockholders will have the opportunity to elect to receive either 0.19409 shares of Equinix common stock or $19.06 in cash for each share of Switch and Data stock, valuing the equity of Switch and Data at approximately $689,000,000 based on the closing price of Equinix common stock as of October 20, 2009. The overall consideration to be paid by the Company in the Switch and Data Acquisition will be 80% Equinix common stock and 20% cash. In the event that holders of more than 80% of Switch and Data’s stock elect to receive Equinix common stock or holders of more than 20% of Switch and Data’s stock elect to receive cash, the consideration of the Switch and Data Acquisition will be pro-rated to achieve these proportions. In addition, a portion of the cash consideration payable to Switch and Data stockholders may be replaced by an equivalent amount of Equinix common stock to the extent necessary to enable the Switch and Data Acquisition to qualify as a tax-free exchange. Switch and Data operates 34 data centers in the U.S. and Canada. The combined company will operate under the Equinix name. The Switch and Data Acquisition will be accounted for using the acquisition method of accounting in accordance with the

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

accounting standard related to the accounting for business combinations. The Company anticipates closing the Switch and Data Acquisition in the first quarter of 2010; however, the closing and its timing are subject to the approval of Switch and Data’s stockholders as well as the satisfaction or waiver of other closing conditions.

The Company has evaluated subsequent events through October 23, 2009, which is the date the consolidated financial statements were issued, and determined that there are no subsequent events that would impact the Company’s condensed consolidated financial statements for the quarterly period ended September 30, 2009.

 

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

 

   

Overview

 

   

Results of Operations

 

   

Liquidity and Capital Resources

 

   

Contractual Obligations and Off-Balance-Sheet Arrangements

 

   

Critical Accounting Estimates

 

   

Recent Accounting Pronouncements

In January 2009, we adopted a FASB amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) and a FASB amendment related to the accounting for instruments granted in share-based payment transactions that are considered participating securities and, therefore, should be included in the calculation of earnings per share, or EPS. These FASB amendments were applied retrospectively; as a result, we adjusted our previously issued comparative condensed consolidated financial statements. See Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

During the three months ended September 30, 2009, we assessed and changed the estimated useful lives of certain of our property, plant and equipment. This change is accounted for as a change in accounting estimate on a prospective basis from the three months ended September 30, 2009. See “Property, Plant and Equipment” in Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

In October 2009, as more fully described in Note 13 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we announced our offer to acquire Switch & Data Facilities Company, Inc., which operates 34 data centers in the U.S. and Canada. We refer to this transaction as the Switch and Data acquisition. The Switch and Data acquisition, which is expected to close in the first quarter of 2010, will have a significant impact to our financial position, results of operations and cash flows.

Overview

Equinix provides global data center services that protect and connect the word’s most valued information assets. Global enterprises, financial services companies, and content and network service providers rely upon Equinix’s leading insight and the company’s 45 data centers in 18 markets around the world for the safeguarding 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 data center services: premium data center colocation, interconnection and exchange services, and outsourced IT infrastructure services. As of September 30, 2009, we operated IBX centers in the Chicago, Dallas, Los Angeles, New York, Silicon

 

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Valley and Washington, D.C. metro areas in the United States; France, Germany, the Netherlands, Switzerland and the United Kingdom in the Europe region; and Australia, Hong Kong, Japan and Singapore in the Asia-Pacific region. In February 2008, we acquired Virtu Secure Webservices B.V., or Virtu, based in the Netherlands to supplement our European operations. We refer to this transaction as the Virtu acquisition. In July 2009, we acquired Upminster GmbH, or Upminster, based in Germany to supplement our European operations. We refer to this transaction as the Upminster acquisition.

Equinix leverages our global data centers in 18 markets around the world as a global service delivery platform which serve more than 90% of the world’s Internet routes and allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global delivery platform and the quality of our IBX centers, we believe we have established a critical mass of customers. As more customers locate in our IBX centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our services. These partners, in turn, pull in their business partners, creating a “marketplace” for their services. Our global delivery platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange thus lowering overall cost and increasing flexibility. Our focused business model is based on our critical mass of customers and the resulting “marketplace” effect. This global delivery platform, combined with our strong financial position, continue to drive new customer growth and bookings as we drive scale into our global business.

Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services with their colocation offerings. The data center services market landscape has evolved to include cloud computing/utility providers, application hosting providers and systems integrators, managed infrastructure hosting providers and colocation providers with over 350 companies providing data center services in the United States alone. Each of these data center services providers can bundle various colocation, interconnection and network services, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 10 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of services. We believe this is a distinct and sustainable competitive advantage.

Our customer count increased to 2,966 as of September 30, 2009 versus 2,203 as of September 30, 2008, an increase of 35%. Our utilization rate represents the percentage of our cabinet space billing versus net sellable cabinet space available taking into account power limitations. Our utilization rate increased to 81% as of September 30, 2009 versus approximately 78% as of September 30, 2008; however, excluding the impact of our IBX center expansion projects that have opened during the last 12 months, our utilization rate would have been approximately 86% as of September 30, 2009. Our utilization rate varies from market to market among our IBX centers across the U.S., Europe 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 centers to support power and cooling needs twice that of previous IBX centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows.

Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service offerings such as our recent announcement of the Switch and Data acquisition. 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 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

 

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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, interconnection and managed infrastructure services. We consider these services recurring as 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 comprise greater than 90% of our total revenues. Over the past few years, greater than half of our then existing customers ordered new services in any given quarter representing greater than half of the new orders received in each quarter, contributing to our revenue growth.

Our non-recurring revenues are primarily comprised of installation services related to a customer’s initial deployment and professional services that we perform. These services are considered to be non-recurring as they are billed typically once and upon completion of the installation or professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the longer of the term of the related contract or expected life of the services. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future.

Our U.S. revenues are derived primarily from colocation and interconnection services while our Europe and Asia-Pacific revenues are derived primarily from colocation and managed infrastructure services.

The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX centers, utility costs, including electricity and bandwidth, IBX 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 centers or open new IBX 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 increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth of consumption by the customer. In addition, the cost of electricity is generally higher in the summer months as compared to other times of the year.

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 headquarters office lease 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 revenue over time, although we expect each of them to grow in absolute dollars in connection with our growth. This is evident in the trends noted below in our discussion on our results of operations. However, for cost of revenues, this trend may periodically be impacted when a large expansion project opens and before it starts generating any meaningful revenue.

Results of Operations

Our results of operations for the nine months ended September 30, 2008 include the operations of Virtu from February 5, 2008 to September 30, 2008. Our results of operations for the three and nine months ended September 30, 2009 include the operations of Upminster from July 22, 2009 to September 30, 2009.

 

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Three Months Ended September 30, 2009 and 2008

Revenues. Our revenues for the three months ended September 30, 2009 and 2008 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Three months ended September 30,     Change  
     2009    %     2008    %     $     %  

U.S:

              

Recurring revenues

   $ 132,307    58   $ 109,422    60   $ 22,885      21

Non-recurring revenues

     4,027    2     5,437    3     (1,410   (26 )% 
                                    
     136,334    60     114,859    63     21,475      19
                                    

Europe:

              

Recurring revenues

     56,913    25     44,174    23     12,739      29

Non-recurring revenues

     3,893    2     3,123    2     770      25
                                    
     60,806    27     47,297    25     13,509      29
                                    

Asia-Pacific:

              

Recurring revenues

     29,114    13     19,921    11     9,193      46

Non-recurring revenues

     1,304    0     1,658    1     (354   (21 )% 
                                    
     30,418    13     21,579    12     8,839      41
                                    

Total:

              

Recurring revenues

     218,334    96     173,517    94     44,817      26

Non-recurring revenues

     9,224    4     10,218    6     (994   (10 )% 
                                    
   $ 227,558    100   $ 183,735    100   $ 43,823      24
                                    

U.S. Revenues. The period over period growth in recurring revenues was primarily the result of an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX centers, as well as selective price increases in each of our IBX markets. During the three months ended September 30, 2009, we recorded approximately $17.6 million of revenue generated from our recently-opened IBX centers or IBX center expansions in the Chicago, Los Angeles and New York metro areas. We expect that our U.S. revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX centers and additional expansions currently taking place in the Chicago, Los Angeles, New York, Silicon Valley and Washington, D.C. metro areas, all of which are expected to open in 2010.

Europe Revenues. Our revenues from the United Kingdom, the largest revenue contributor in the Europe region, represented approximately 36% and 37%, respectively, of the regional revenues for the three months ended September 30, 2009 and 2008. As in the U.S., Europe revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX centers. During the three months ended September 30, 2009, we recorded approximately $2.5 million of revenue from our recently-opened IBX centers or IBX center expansions in the Amsterdam, Frankfurt and Paris metro areas. We expect that our Europe revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX centers or IBX center expansions and additional expansions currently taking place in the Frankfurt, Geneva, London and Zurich metro areas, all of which are expected to open during the remainder of 2009 and the first half of 2010.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 37% and 38%, respectively, of the regional revenues for the three months ended September 30, 2009 and 2008. As in the U.S., Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX centers, as well as selective price increases in each of our IBX markets. During the three months ended September 30, 2009, we recorded approximately $7.1 million of revenue generated from our IBX centers or IBX center expansions in the Hong Kong, Singapore and Sydney metro areas. 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 centers or IBX center expansions.

 

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Cost of Revenues. Our cost of revenues for the three months ended September 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Three months ended September 30,     Change  
     2009    %     2008    %     $    %  

U.S.

   $ 69,223    55   $ 63,832    58   $ 5,391    8

Europe

     40,358    32     32,727    30     7,631    23

Asia-Pacific

     16,426    13     13,346    12     3,080    23
                                   

Total

   $ 126,007    100   $ 109,905    100   $ 16,102    15
                                   

 

     Three months ended
September 30,
 
     2009     2008  
Cost of revenues as a percentage of revenues:     

U.S.

   51   56

Europe

   66   69

Asia-Pacific

   54   62

Total

   55   60

U.S. Cost of Revenues. U.S. cost of revenues for the three months ended September 30, 2009 and 2008 included $24.4 million and $24.9 million, respectively, of depreciation expense. During the three months ended September 30, 2009, we revised the estimated useful lives of certain of our property, plant and equipment. As a result, our U.S. depreciation expense decreased by $2.3 million during the three months ended September 30, 2009; however, this decrease was mostly offset by additional depreciation expense of $1.8 million due to our IBX center expansion activity. Excluding depreciation, the increase in U.S. cost of revenues was primarily due to overall growth related to our revenue growth and costs associated with our expansion projects, including an increase of $3.2 million in rent and facility costs and an increase of $1.8 million in utility costs as a result of increased customer installations. We expect U.S. cost of revenues to increase as we continue to grow our business.

Europe Cost of Revenues. Europe cost of revenues for the three months ended September 30, 2009 and 2008 included $11.8 million and $8.3 million, respectively, of depreciation expense. Growth in depreciation expense of $3.8 million was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $307,000 decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation expense, the increase in Europe cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in connection with revenue growth, such as $2.2 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth. We expect Europe cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the three months ended September 30, 2009 and 2008 included $5.3 million and $4.2 million, respectively, of depreciation expense. Growth in depreciation expense of $3.3 million was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $2.2 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in connection with revenue growth. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

 

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Sales and Marketing Expenses. Our sales and marketing expenses for the three months ended September 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Three months ended September 30,     Change  
     2009    %     2008    %     $     %  

U.S.

   $ 8,833    57   $ 9,628    60   $ (795   (8 )% 

Europe

     4,094    26     4,181    26     (87   (2 )% 

Asia-Pacific

     2,616    17     2,200    14     416      19
                                    

Total

   $ 15,543    100   $ 16,009    100   $ (466   (3 )% 
                                    

 

     Three months ended
September 30,
 
     2009     2008  
Sales and marketing expenses as a percentage of revenues:     

U.S.

   6   8

Europe

   7   9

Asia-Pacific

   9   10

Total

   7   9

U.S. Sales and Marketing Expenses. Our U.S. sales and marketing expenses did not change significantly. We generally expect U.S. sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we expect them to decrease.

Europe Sales and Marketing Expenses. Our Europe sales and marketing expenses did not change significantly. We generally expect Europe sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we expect them to decrease.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including general salaries, bonuses and stock-based compensation expense. We expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we expect them to decrease.

General and Administrative Expenses. Our general and administrative expenses for the three months ended September 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Three months ended September 30,     Change  
     2009    %     2008    %     $    %  

U.S.

   $ 26,387    68   $ 24,390    69   $ 1,997    8

Europe

     8,200    21     7,225    20     975    13

Asia-Pacific

     4,484    11     3,914    11     570    15
                                   

Total

   $ 39,071    100   $ 35,529    100   $ 3,542    10
                                   

 

     Three months ended
September 30,
 
     2009     2008  
General and administrative expenses as a percentage of revenues:     

U.S.

   19   21

Europe

   13   15

Asia-Pacific

   15   18

Total

   17   19

 

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U.S. General and Administrative Expenses. The increase in U.S. general and administrative expenses was primarily due to higher compensation costs, including general salaries, bonuses and headcount growth (295 U.S. general and administrative employees as of September 30, 2009 versus 251 as of September 30, 2008). Going forward, although we are carefully monitoring our spending given the current economic environment, we expect U.S. general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we expect them to decrease.

Europe General and Administrative Expenses. The increase in Europe general and administrative expenses was primarily due to higher compensation costs, including general salaries, bonuses, stock-based compensation expense and headcount growth (105 Europe general and administrative employees as of September 30, 2009 versus 85 as of September 30, 2008). Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our Europe general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth and in connection with various ongoing integration initiatives related to investments in systems and internal control compliance; however, as a percentage of revenues, we expect them to decrease.

Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to higher compensation costs, including stock-based compensation expense and headcount growth (105 Asia-Pacific general and administrative employees as of September 30, 2009 versus 83 as of September 30, 2008). Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we expect them to decrease.

Restructuring Charges. During the three months ended September 30, 2008, we recorded a restructuring charge adjustment of $799,000 from revised sublease assumptions on our excess space lease in the Los Angeles metro area. During the three months ended September 30, 2009, no restructuring charge was recorded.

Acquisition Costs. During the three months ended September 30, 2009, we recorded acquisition costs totaling $1.4 million, primarily related to the Upminster acquisition. During the three months ended September 30, 2008, no acquisition costs were recorded.

Interest Income. Interest income decreased to $353,000 for the three months ended September 30, 2009 from $2.0 million for the three months ended September 30, 2008. Interest income decreased primarily due to lower yields on invested balances. The average yield for the three months ended September 30, 2009 was 0.36% versus 2.23% for the three months ended September 30, 2008. We expect our interest income to remain at these low levels for the foreseeable future due to a low interest rate environment and as we continue to utilize our cash to finance our expansion activities.

Interest Expense. Interest expense increased to $22.3 million for the three months ended September 30, 2009 from $15.7 million for the three months ended September 30, 2008. The increase in interest expense was primarily due to higher loan balances as a result of loan drawdowns and new financings entered into during 2008 and 2009 consisting of (i) our $373.8 million 4.75% convertible subordinated notes offering in June 2009, (ii) our Netherlands financing, of which $10.2 million was outstanding as of September 30, 2009 with an approximate interest rate of 3.6% per annum as compared to $6.1 million outstanding as of September 30, 2008 with an approximate interest rate of 6.5% per annum and (iii) our Asia-Pacific financing, of which $73.0 million was outstanding as of September 30, 2009 with an approximate blended interest rate of 3.0% per annum as compared to $65.4 million outstanding as of September 30, 2008 with an approximate blended interest rate of 4.28% per annum. The increase was partially offset by higher capitalized interest expense, repayment of some loans and the partial conversions of certain of our convertible subordinated debentures in November 2008 and June 2009. During the three months ended September 30, 2009 and 2008, we capitalized $2.6 million and $2.0 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we fully utilize or recognize the full impact of our existing financings and as we complete expansion efforts and cease to capitalize interest expense.

 

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Other-Than-Temporary Impairment Loss On Investments. For the three months ended September 30, 2008, we recorded a $1.5 million other-than-temporary impairment loss on one of our money market accounts as more fully described in Note 7 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report. During the three months ended September 30, 2009, we did not record any other-than-temporary impairment losses on our investments.

Other Income (Expense). For the three months ended September 30, 2009, we recorded $2.5 million of other income, primarily attributable to foreign currency exchange gains during the period. For the three months ended September 30, 2008, we recorded $520,000 of other expense, primarily attributable to foreign currency exchange losses during the period.

Income Taxes. For the three months ended September 30, 2009, we recorded $7.3 million of income tax expense. The tax expense recorded in the three months ended September 30, 2009 was a result of applying the annual effective tax rates estimated for the year to the operating results of the period, partially offset by income tax benefits due to the release of valuation allowance of $4.0 million associated with our Hong Kong operations. For the three months ended September 30, 2008, we recorded $187,000 of income tax expense attributable to our foreign operations. Our effective tax rates were 28.0% and 3.3% for the three months ended September 30, 2009 and 2008, respectively. The increase in our effective tax rate is primarily a result of our domestic operations no longer carrying a valuation allowance against the net deferred tax assets of those operations which achieved sufficient profitability in the fourth quarter of 2008. We have not incurred any meaningful cash income tax expense since inception and we do not expect to incur any significant cash income tax expense during the remainder of 2009 because we still have a large amount of net operating loss carry-forwards in all of the jurisdictions in which we operate, which can be used to offset the taxable profit generated in 2009. The cash tax for 2009 is primarily for the U.S. Alternative Minimum Tax, the foreign income tax in the United Kingdom and the California state income tax as a result of California temporarily suspending the utilization of net operating loss carry-forwards. Additionally, we may recognize income tax benefits attributable to certain of our foreign operations in future periods as a result of the release of our remaining valuation allowances.

Nine Months Ended September 30, 2009 and 2008

Revenues. Our revenues for the nine months ended September 30, 2009 and 2008 were generated from the following revenue classifications and geographic regions (dollars in thousands):

 

     Nine months ended September 30,     Change  
     2009    %     2008    %     $     %  

U.S:

              

Recurring revenues

   $ 380,490    59   $ 308,319    60   $ 72,171      23

Non-recurring revenues

     10,484    2     12,983    2     (2,499   (19 )% 
                                    
     390,974    61     321,302    62     69,672      22
                                    

Europe:

              

Recurring revenues

     153,328    24     123,365    24     29,963      24

Non-recurring revenues

     10,334    2     8,974    2     1,360      15
                                    
     163,662    26     132,339    26     31,323      24
                                    

Asia-Pacific:

              

Recurring revenues

     81,116    13     55,587    11     25,529      46

Non-recurring revenues

     4,205    0     4,769    1     (564   (12 )% 
                                    
     85,321    13     60,356    12     24,965      41
                                    

Total:

              

Recurring revenues

     614,934    96     487,271    95     127,663      26

Non-recurring revenues

     25,023    4     26,726    5     (1,703   (6 )% 
                                    
   $ 639,957    100   $ 513,997    100   $ 125,960      25
                                    

U.S. Revenues. The period over period growth in recurring revenues was primarily the result of an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX centers, as well as selective price increases in each of our IBX markets. During the nine months ended September 30, 2009, we recorded approximately $47.3 million of revenue generated from our recently-

 

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opened IBX centers or IBX center expansions in the Chicago, Los Angeles and New York metro areas. We expect that our U.S. revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX centers or IBX center expansions and additional expansions currently taking place in the Chicago, Los Angeles, New York, Silicon Valley and Washington, D.C. metro areas, all of which are expected to open during 2010.

Europe Revenues. Our revenues from the United Kingdom, the largest revenue contributor in the Europe region, represented approximately 37% and 39%, respectively, of the regional revenues for the nine months ended September 30, 2009 and 2008. As in the U.S., Europe revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX centers. During the nine months ended September 30, 2009, we recorded approximately $28.2 million of revenue from our recently-opened IBX centers or IBX center expansions in the Amsterdam, Frankfurt, London and Paris metro areas. We expect that our Europe revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX centers or IBX center expansions and additional expansions currently taking place in the Amsterdam, Geneva, Frankfurt, London and Zurich metro areas, all of which are expected to open during the remainder of 2009 and the first half of 2010.

Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 36% of the regional revenues for both the nine months ended September 30, 2009 and 2008. As in the U.S., Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX centers, as well as selective price increases in each of our IBX markets. During the nine months ended September 30, 2009, we recorded approximately $17.4 million of revenue generated from our IBX centers or IBX center expansions in the Hong Kong, Singapore and Sydney metro areas. 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 centers or IBX center expansions.

Cost of Revenues. Our cost of revenues for the nine months ended September 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Nine months ended September 30,     Change  
     2009    %     2008    %     $    %  

U.S.

   $ 199,701    56   $ 175,721    57   $ 23,980    14

Europe

     106,798    30     92,608    30     14,190    15

Asia-Pacific

     49,847    14     38,124    13     11,723    31
                                   

Total

   $ 356,346    100   $ 306,453    100   $ 49,893    16
                                   

 

     Nine months ended
September 30,
 
     2009     2008  
Cost of revenues as a percentage of revenues:     

U.S.

   51   55

Europe

   65   70

Asia-Pacific

   58   63

Total

   56   60

U.S. Cost of Revenues. U.S. cost of revenues for the nine months ended September 30, 2009 and 2008 included $73.9 million and $67.7 million, respectively, of depreciation expense. Growth in depreciation expense of $8.5 million was due to our IBX center expansion activity; however, this growth was partially offset by a $2.3 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation, the increase in U.S. cost of revenues was primarily due to overall growth related to our revenue growth and costs associated with our expansion projects, including (i) an increase of $8.1 million in utility costs as a result of increased customer installations, (ii) an increase of $6.7 million in rent and facility

 

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costs and (iii) $3.9 million in higher compensation costs, primarily as a result of headcount growth (302 U.S. employees as of September 30, 2009 versus 275 as of September 30, 2008). We expect U.S. cost of revenues to increase as we continue to grow our business.

Europe Cost of Revenues. Europe cost of revenues for the nine months ended September 30, 2009 and 2008 included $29.5 million and $23.1 million, respectively, of depreciation expense. Growth in depreciation expense of $6.7 million was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $307,000 decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation expense, the increase in Europe cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in connection with revenue growth, such as $6.5 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth. We expect Europe cost of revenues to increase as we continue to grow our business.

Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the nine months ended September 30, 2009 and 2008 included $18.0 million and $11.9 million, respectively, of depreciation expense. Growth in depreciation expense of $8.3 million was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $2.2 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the three months ended September 30, 2009. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in connection with revenue growth, such as $3.1 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business.

Sales and Marketing Expenses. Our sales and marketing expenses for the nine months ended September 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Nine months ended September 30,     Change  
     2009    %     2008    %     $     %  

U.S.

   $ 26,297    57   $ 26,799    57   $ (502   (2 )% 

Europe

     12,756    28     13,361    29     (605   (5 )% 

Asia-Pacific

     7,262    15     6,490    14     772      12
                                    

Total

   $ 46,315    100   $ 46,650    100   $ (335   (1 )% 
                                    

 

     Nine months ended
September 30,
 
     2009     2008  
Sales and marketing expenses as a percentage of revenues:     

U.S.

   7   8

Europe

   8   10

Asia-Pacific

   9   11

Total

   7   9

U.S. Sales and Marketing Expenses. Our U.S. sales and marketing expenses did not change significantly. We generally expect U.S. sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we expect them to decrease.

Europe Sales and Marketing Expenses. Our Europe sales and marketing expenses did not change significantly. We generally expect Europe sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we expect them to decrease.

Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including general salaries, bonuses and stock-based compensation expense. We expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business; however, as a percentage of revenues, we expect them to decrease.

 

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General and Administrative Expenses. Our general and administrative expenses for the nine months ended September 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Nine months ended September 30,     Change  
     2009    %     2008    %     $     %  

U.S.

   $ 76,449    69   $ 73,239    65   $ 3,210      4

Europe

     22,641    20     26,301    24     (3,660   (14 )% 

Asia-Pacific

     12,587    11     11,810    11     777      7
                                    

Total

   $ 111,677    100   $ 111,350    100   $ 327      0
                                    

 

     Nine months ended
September 30,
 
     2009     2008  
General and administrative expenses as a percentage of revenues:     

U.S.

   20   23

Europe

   14   20

Asia-Pacific

   15   20

Total

   17   22

U.S. General and Administrative Expenses. The increase in our U.S. general and administrative expenses was primarily due to compensation costs, including general salaries, bonuses and headcount growth (295 U.S. general and administrative employees as of September 30, 2009 versus 251 as of September 30, 2008). Going forward, although we are carefully monitoring our spending given the current economic environment, we expect U.S. general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we expect them to decrease.

Europe General and Administrative Expenses. The decrease in our Europe general and administrative expenses was primarily due to a $3.1 million one-time stock-based compensation charge due to equity award modifications related to the resignation of two senior officers in Europe during the nine months ended September 30, 2008. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our Europe general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth and in connection with various ongoing integration initiatives related to investments in systems and internal control compliance; however, as a percentage of revenues, we expect them to decrease.

Asia-Pacific General and Administrative Expenses. Our Asia-Pacific general and administrative expenses did not change significantly. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we expect them to decrease.

Restructuring Charges. During the nine months ended September 30, 2009, we recorded reductions of restructuring charges totaling $6.1 million, primarily due to a reversal of a restructuring charge accrual of $5.8 million for our excess space in the Los Angeles metro area as a result of our decision to utilize this space to expand our original Los Angeles IBX center. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. During the nine months ended September 30, 2008, we recorded a restructuring charge adjustment of $799,000 from revised sublease assumptions on our excess space lease in the Loss Angeles metro area.

Acquisition Costs. During the nine months ended September 30, 2009, we recorded acquisition costs totaling $1.4 million, primarily related to the Upminster acquisition. During the nine months ended September 30, 2008, we did not expense direct acquisition costs pursuant to the accounting standard applicable to that period.

 

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Interest Income. Interest income decreased to $1.9 million for the nine months ended September 30, 2009 from $7.8 million for the nine months ended September 30, 2008. Interest income decreased primarily due to lower yields on invested balances. The average yield for the nine months ended September 30, 2009 was 0.64% versus 3.0% for the nine months ended September 30, 2008. We expect our interest income to remain at these low levels for the foreseeable future due to a low interest rate environment and as we continue to utilize our cash to finance our expansion activities.

Interest Expense. Interest expense was $51.6 million and $45.2 million, respectively, for the nine months ended September 30, 2009 and 2008. The increase in interest expense was primarily due to higher loan balances as a result of loan drawdowns and new financings entered into during 2008 and 2009 consisting of (i) our $373.8 million 4.75% convertible subordinated notes offering in June 2009, (ii) our Netherlands financing, of which $10.2 million was outstanding as of September 30, 2009 with an approximate interest rate of 3.6% per annum as compared to $6.1 million outstanding as of September 30, 2008 with an approximate interest rate of 6.5% per annum and (iii) our Asia-Pacific financing, of which $73.0 million was outstanding as of September 30, 2009 with an approximate blended interest rate of 3.0% per annum as compared to $65.4 million outstanding as of September 30, 2008 with an approximate blended interest rate of 4.28% per annum. The increase was partially offset by higher capitalized interest expense, repayment of some loans and the partial conversions of certain of our convertible subordinated debentures in November 2008 and June 2009. During the nine months ended September 30, 2009 and 2008, we capitalized $10.4 million and $6.7 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we fully utilize or recognize the full impact of our existing financings, including the $373.8 million 4.75% convertible subordinated notes offering and the Singapore financing, and as we complete expansion efforts and cease to capitalize interest expense.

Other-Than-Temporary Impairment Loss On Investments. For the nine months ended September 30, 2009 and 2008, we recorded $2.7 million and $1.5 million, respectively, of other-than-temporary impairment losses on one of our money market accounts as more fully described in Note 7 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report.

Other Income (Expense). For the nine months ended September 30, 2009 and 2008, we recorded $3.7 million and $602,000, respectively, of other income, primarily attributable to foreign currency exchange gains during the periods.

Income Taxes. For the nine months ended September 30, 2009 and 2008, we recorded $29.9 million and $400,000, respectively, of income tax expense. The tax expense recorded in the nine months ended September 30, 2009 was a result of applying the annual effective tax rates estimated for the year to the operating results of the period, partially offset by income tax benefits due to the release of valuation allowance of $4.0 million associated with our Hong Kong operations. The income tax expense recorded in the nine months ended September 30, 2008 was attributable to our foreign operations. Our effective tax rates were 36.6% and 3.8% for the nine months ended September 30, 2009 and 2008, respectively. The increase in our effective tax rate is primarily a result of our domestic operations no longer carrying a valuation allowance against the net deferred tax assets of those operations which achieved sufficient profitability in the fourth quarter of 2008. We have not incurred any meaningful cash income tax expense since inception and we do not expect to incur any significant cash income tax expense during the remainder of 2009 because we still have a large amount of net operating loss carry-forwards in all the jurisdictions in which we operate, which can be used to offset the taxable profit generated in 2009. The cash tax for 2009 is primarily for the U.S. Alternative Minimum Tax, the foreign income tax in the United Kingdom and the California state income tax as a result of California temporarily suspending the utilization of net operating loss carry-forwards. Additionally, we may recognize income tax benefits attributable to certain of our foreign operations in future periods as a result of the release of our remaining valuation allowances.

 

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Liquidity and Capital Resources

As of September 30, 2009, our total indebtedness was comprised of (i) convertible debt principal totaling $1.0 billion from our 2.50% convertible subordinated notes (gross of discount), our 3.00% convertible subordinated notes and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible debt and financing obligations totaling $607.9 million of principal from our Washington D.C. metro area IBX capital lease, San Jose IBX equipment and fiber financing, Chicago IBX equipment financing, Los Angeles IBX financing, Paris metro area IBX capital lease, Ashburn campus mortgage payable, Chicago IBX financing, Asia-Pacific financing, European financing, Netherlands financing, Singapore financing and other financing obligations.

We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of our current portion of debt due, and to complete our publicly-announced expansion projects, as well as the Switch and Data acquisition, of which 20% of the total purchase price is payable in cash, for at least the next 12 months. As of September 30, 2009, we had $627.4 million of cash, cash equivalents and short-term and long-term investments. Besides our investment portfolio and any financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate further, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.

As of September 30, 2009, we had a total of approximately $16.0 million of additional liquidity available to us, which consists of (i) $3.2 million under the European financing for general working capital purposes, (ii) $10.3 million under the $25.0 million Bank of America revolving credit line and (iii) $2.5 million under the Singapore financing. Our indebtedness as of September 30, 2009, as noted above, consisted of $607.9 million of non-convertible senior debt. Although these are committed facilities, most of which are fully drawn or utilized and for which we are amortizing debt repayments of either principal and/or interest only, and we are in full compliance with all covenants related to them effective September 30, 2009, deteriorating market and liquidity conditions may give rise to issues which may impact the lenders’ ability to hold these debt commitments to their full term.

While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX expansion plans, we may pursue additional expansion opportunities, primarily the build-out of new IBX centers, in certain of our existing markets which are at or near capacity within the next year, as well as potential acquisitions. While we will be able to fund some of these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain of these additional expansion plans. However, if current market conditions were to deteriorate further, we may be unable to secure additional financing or any such additional financing may be available to us on unfavorable terms. An inability to pursue additional expansion opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods.

Sources and Uses of Cash

 

     Nine Months Ended
September 30,
 
     2009     2008  
     (in thousands)  

Net cash provided by operating activities

   $ 272,982      $ 191,263   

Net cash used in investing activities

     (542,494     (434,850

Net cash provided by financing activities

     326,520        112,950   

Operating Activities. The increase in net cash provided by operating activities was primarily due to improved operating results as discussed above, strong collections of accounts receivable and management of vendor payments. We expect that we will continue to generate cash from our operating activities during the remainder of 2009 and beyond.

 

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Investing Activities. The increase in net cash used in investing activities was primarily due to higher purchase of investments, partially offset by lower capital expenditures. We expect that our IBX expansion activity during 2009 will be less than in 2008 as we carefully manage investing activities during the current economic environment.

Financing Activities. Net cash provided by financing activities during the nine months ended September 30, 2009 was primarily the result of $373.8 million in gross proceeds from our 4.75% convertible notes offering and proceeds from our Singapore financing and employee equity awards, partially offset by repayments of our debt facilities and the costs of our capped call transactions entered into in connection with our $373.8 million 4.75% convertible subordinated notes offering. Net cash provided by financing activities during the nine months ended September 30, 2008 was primarily due to loan drawdowns for ongoing expansion projects. We expect that our financing activities will consist primarily of repayment of our debt during the remainder of 2009.

Debt Obligations

4.75% Convertible Subordinated Notes. In June 2009, we issued $373.8 million aggregate principal amount of 4.75% convertible subordinated notes due June 15, 2016. Interest is payable semi-annually on June 15 and December 15 of each year, beginning December 15, 2009. The initial conversion rate is 11.8599 shares of common stock per $1,000 principal amount of 4.75% convertible subordinated notes, subject to adjustment. This represents an initial conversion price of approximately $84.32 per share of common stock. Upon conversion, holders will receive, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. As of September 30, 2009, the 4.75% convertible subordinated notes were convertible into 4.4 million shares of our common stock.

Holders of the 4.75% convertible subordinated notes may convert their notes under certain defined circumstances, including during any fiscal quarter (and only during that fiscal quarter) ending after September 30, 2009, if the sale price of our common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than 130% of the conversion price per share of common stock on such last trading day, which was $119.60 per share as of September 30, 2009 or at any time on or after March 15, 2016.

Upon conversion, if we elected to pay a sufficiently large portion of the conversion obligation in cash, additional consideration beyond the $373.8 million of gross proceeds received would be required. However, to minimize the impact of potential dilution upon conversion of the 4.75% convertible subordinated notes, we entered into capped call transactions, which are referred to as the capped call, separate from the issuance of the 4.75% convertible subordinated notes, for which we paid a premium of $49.7 million. The capped call covers a total of approximately 4.4 million shares of our common stock, subject to adjustment. Under the capped call, we effectively raised the conversion price of the 4.75% convertible subordinated notes from $84.32 to $114.82. Depending upon our stock price at the time the 4.75% convertible subordinated notes are converted, the capped call will return up to 1.2 million shares of our common stock to us; however, we will receive no benefit from the capped call if our stock price is $84.32 or lower at the time of conversion and will receive less shares for share prices in excess of $114.82 at the time of conversion than we would have received at a share price of $114.82 (our benefit from the capped call is capped at $114.82 and no additional benefit is received beyond this price).

We do not have the right to redeem the 4.75% convertible subordinated notes at our option.

2.50% Convertible Subordinated Notes. In January 2009, we adopted a FASB amendment related to the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). As a result, we have separately accounted for the liability and equity components of our 2.50% convertible subordinated notes. See “2.50% Convertible Subordinated Notes” in Note 8 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.

Convertible Subordinated Debentures. In June 2009, we entered into agreements with the holders of the remaining $19.2 million of these convertible subordinated debentures to exchange an aggregate of 484,809 newly issued shares of our common stock to settle the convertible subordinated debentures. The number of shares of common stock issued equals the amount issuable upon conversion of the convertible subordinated debentures in accordance with their original terms. As of September 30, 2009, there were no convertible subordinated debentures outstanding.

 

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Singapore Financing. In September 2009, our wholly-owned subsidiary in Singapore entered into a 37.0 million Singapore dollar, or approximately $26.2 million (using the exchange rate as of September 30, 2009) credit facility agreement, which is referred to as the Singapore financing. The Singapore financing is comprised of two tranches: (i) Facility A, which is available for drawing upon through March 18, 2010, provides a term loan of up to 34.5 million Singapore dollars and (ii) Facility B, which is available for drawing upon through September 12, 2010, provides a term loan of up to 2.5 million Singapore dollars. The loans payable under the Singapore financing bear interest at a floating rate (Swap offer rate plus 3.65% per annum). Facility A will be repaid in nine semi-annual installments beginning August 2010 and Facility B will be repaid in eight semi-annual installments beginning February 2011. The Singapore financing has a final maturity date of August 31, 2014 and interest is payable in periods of one, three or six months at the election of our Singaporean subsidiary. The Singapore financing is guaranteed by the parent, Equinix, and is secured by the assets of our second IBX center in Singapore. The Singapore financing has several financial covenants specific to our operations in Singapore, with which we must comply periodically. As of September 30, 2009, we had borrowings under the Facility A tranche of 33.5 million Singapore dollars, or approximately $23.8, at an approximate interest rate per annum of 4.15%, leaving 3.5 million Singapore dollars, or approximately $2.5 million, available for future borrowings under the Singapore financing.

Netherlands Financing. In June 2009, our wholly-owned subsidiary in the Netherlands amended a 5.5 million Euro senior credit facility, which is referred to as the Netherlands financing, which was assumed as a result of the Virtu acquisition, by entering into a 7.0 million Euro term loan to replace the previously outstanding senior credit facility. The Netherlands financing contains several financial covenants, which we must comply with annually, is guaranteed by us and is collateralized by substantially all of our operations in the Netherlands. The Netherlands financing has a final maturity date of June 30, 2016 with repayment to occur over the remaining seven years in 28 equal quarterly installments starting September 30, 2009. The Netherlands financing bears interest at a floating rate (three month EURIBOR plus 3.60% per annum). As of September 30, 2009, a total of 7.0 million Euros, or approximately $10.2 million, was outstanding under the Netherlands financing.

$25.0 Million Bank of America Revolving Credit Line. In February 2009, we entered into a $25.0 million one-year revolving credit facility with Bank of America, which is referred to as the $25.0 million Bank of America revolving credit line. The $25.0 million Bank of America revolving credit line will be used primarily to fund our working capital and to enable us to issue letters of credit. The effect of issuing letters of credit under the $25.0 million Bank of America revolving credit line will be to reduce the amount available for borrowing under the $25.0 million Bank of America revolving credit line. We may borrow, repay and reborrow under the $25.0 million Bank of America revolving credit line at either the prime rate or at a borrowing margin of 2.75% over one, three or six month LIBOR, subject to a minimum borrowing cost of 3.00%. The $25.0 million Bank of America revolving credit line contains three financial covenants, which we must comply with quarterly, consisting of a tangible net worth ratio, a debt service ratio and a senior leverage ratio and is collateralized by our domestic accounts receivable balances. As of September 30, 2009, we were in compliance with all financial covenants in connection with the Bank of America revolving credit line. The $25.0 million Bank of America revolving credit line is available for renewal subject to mutual agreement by both parties. During the nine months ended September 30, 2009, we entered into nine irrevocable letters of credit totaling $14.7 million under the $25.0 million Bank of America revolving credit line, which resulted in our release of restricted cash to unrestricted cash. As a result, the amount available to borrow was $10.3 million as of September 30, 2009.

 

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Contractual Obligations and Off-Balance Sheet Arrangements

We lease a majority of our IBX centers and certain equipment under non-cancelable lease agreements expiring through 2027. The following represents our debt maturities, financings, leases and other contractual commitments as of September 30, 2009 (in thousands):

 

     2009
(3 months)
   2010    2011    2012     2013    2014 and
thereafter
   Total

Convertible debt (1)

   $ —      $ —      $ —      $ 250,000      $ —      $ 769,736    $ 1,019,736

Chicago IBX financing (1)

     —        —        —        109,991 (5)      —        —        109,991

Asia-Pacific financing (1)

     8,116      32,463      28,379      4,032        —        —        72,990

European financing (1)

     4,403      15,923      17,685      21,243        25,646      50,555      135,455

Netherlands financing (1)

     732      1,464      1,464      1,464        1,464      3,659      10,247

Singapore financing (1)

     —        1,188      5,941      5,941        5,941      4,753      23,764

Interest (2)

     13,254      52,184      44,952      34,090        31,298      53,793      229,571

Mortgage payable (3)

     2,541      10,164      10,164      10,164        10,165      123,339      166,537

Other note payable (3)

     2,500      —        —        —          —        —