Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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 June 30, 2009 was 38,610,640.

 

 

 


Table of Contents

EQUINIX, INC.

INDEX

 

          Page No.

Part I - Financial Information

  

Item 1.

   Condensed Consolidated Financial Statements (unaudited):   
   Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008    3
   Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008    4
   Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 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    33

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk    47

Item 4.

   Controls and Procedures    47

Part II - Other Information

  

Item 1.

   Legal Proceedings    48

Item 1A.

   Risk Factors    49

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    64

Item 3.

   Defaults Upon Senior Securities    64

Item 4.

   Submission of Matters to a Vote of Security Holders    64

Item 5.

   Other Information    65

Item 6.

   Exhibits    66

Signatures

   72

Index to Exhibits

   73

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

EQUINIX, INC.

Condensed Consolidated Balance Sheets

(in thousands)

 

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

Current assets:

    

Cash and cash equivalents

   $ 405,217      $ 220,207   

Short-term investments

     175,854        42,112   

Accounts receivable, net

     67,312        66,029   

Current portion of deferred tax assets, net

     18,996        35,936   

Other current assets

     22,081        15,227   
                

Total current assets

     689,460        379,511   

Long-term investments

     22,299        45,626   

Property, plant and equipment, net

     1,590,756        1,492,830   

Goodwill

     382,112        342,829   

Intangible assets, net

     54,619        50,918   

Deferred tax assets, net

     43,332        65,228   

Other assets

     60,787        57,794   
                

Total assets

   $ 2,843,365      $ 2,434,736   
                
Liabilities and Stockholders’ Equity     

Current liabilities:

    

Accounts payable and accrued expenses

   $ 88,454      $ 74,317   

Accrued property, plant and equipment

     59,773        89,518   

Current portion of capital lease and other financing obligations

     6,036        4,499   

Current portion of mortgage and loans payable

     52,113        52,054   

Current portion of convertible debt

     —          19,150   

Other current liabilities

     46,259        50,455   
                

Total current liabilities

     252,635        289,993   

Capital lease and other financing obligations, less current portion

     138,532        133,031   

Mortgage and loans payable, less current portion

     372,491        386,446   

Convertible debt, less current portion

     883,131        608,510   

Other liabilities

     103,954        100,095   
                

Total liabilities

     1,750,743        1,518,075   
                

Commitments and contingencies (Note 9)

    

Stockholders’ equity:

    

Common stock

     39        38   

Additional paid-in capital

     1,608,618        1,524,834   

Accumulated other comprehensive loss

     (93,521     (152,800

Accumulated deficit

     (422,514     (455,411
                

Total stockholders’ equity

     1,092,622        916,661   
                

Total liabilities and stockholders’ equity

   $ 2,843,365      $ 2,434,736   
                

See accompanying notes to condensed consolidated financial statements

 

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Table of Contents

EQUINIX, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009     2008
As Adjusted
(Note 2)
    2009     2008
As Adjusted
(Note 2)
 
     (unaudited)  

Revenues

   $ 213,168      $ 172,044      $ 412,399      $ 330,262   
                                

Costs and operating expenses:

        

Cost of revenues

     118,534        102,039        230,339        196,548   

Sales and marketing

     16,369        15,290        30,772        30,641   

General and administrative

     37,456        41,445        72,606        75,821   

Restructuring charges

     (220     —          (6,053     —     
                                

Total costs and operating expenses

     172,139        158,774        327,664        303,010   
                                

Income from operations

     41,029        13,270        84,735        27,252   

Interest income

     680        2,411        1,596        5,852   

Interest expense

     (15,912     (14,313     (29,363     (29,508

Other-than-temporary impairment loss on investments

     —          —          (2,687     —     

Other income (expense)

     2,610        (918     1,191        1,122   
                                

Income before income taxes

     28,407        450        55,472        4,718   

Income tax benefit (expense)

     (10,967     258        (22,575     (213
                                

Net income

   $ 17,440      $ 708      $ 32,897      $ 4,505   
                                

Earnings per share:

        

Basic earnings per share

   $ 0.46      $ 0.02      $ 0.87      $ 0.12   
                                

Weighted-average shares

     38,152        36,964        38,007        36,827   
                                

Diluted earnings per share

   $ 0.44      $ 0.02      $ 0.84      $ 0.12   
                                

Weighted-average shares

     39,318        37,968        39,008        37,718   
                                

See accompanying notes to condensed consolidated financial statements

 

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EQUINIX, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

     Six months ended
June 30,
 
     2009     2008
As Adjusted
(Note 2)
 
     (unaudited)  

Cash flows from operating activities:

    

Net income

   $ 32,897      $ 4,505   

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

    

Depreciation

     83,921        70,261   

Stock-based compensation

     24,997        29,389   

Restructuring charges

     (6,053     —     

Amortization of intangible assets

     2,646        3,546   

Amortization of debt issuance costs and debt discount

     5,714        5,672   

Accretion of asset retirement obligation and accrued restructuring charges

     536        825   

Realized net losses on investments

     2,670        —     

Other items

     1,155        (740

Changes in operating assets and liabilities:

    

Accounts receivable

     (1,026     (1,531

Deferred tax assets, net

     16,939        —     

Other assets

     (13,445     719   

Accounts payable and accrued expenses

     12,965        5,537   

Other liabilities

     1,527        9,759   
                

Net cash provided by operating activities

     165,443        127,942   
                

Cash flows from investing activities:

    

Purchases of investments

     (149,763     (167,175

Sales of investments

     20,754        13,676   

Maturities of investments

     16,472        74,568   

Purchase of Virtu, net of cash acquired

     —          (23,241

Purchases of other property, plant and equipment

     (151,785     (210,101

Accrued property, plant and equipment

     (27,822     (26,241

Purchase of restricted cash

     (893     (14,234

Release of restricted cash

     11,013        333   

Other investing activities

     79        —     
                

Net cash used in investing activities

     (281,945     (352,415
                

Cash flows from financing activities:

    

Proceeds from employee equity awards

     8,954        19,238   

Proceeds from convertible debt

     373,750        —     

Proceeds from loans payable

     744        77,525   

Repayment of capital lease and other financing obligations

     (2,338     (1,918

Repayment of mortgage and loans payable

     (23,522     (7,422

Capped call costs

     (49,664     —     

Convertible debt issuance costs

     (9,956     —     

Other financing activities

     (252     (901
                

Net cash provided by financing activities

     297,716        86,522   
                

Effect of foreign currency exchange rates on cash and cash equivalents

     3,796        (1,555
                

Net increase (decrease) in cash and cash equivalents

     185,010        (139,506

Cash and cash equivalents at beginning of period

     220,207        290,633   
                

Cash and cash equivalents at end of period

   $ 405,217      $ 151,127   
                

Supplemental cash flow information:

    

Cash paid for taxes

   $ 1,220      $ 336   
                

Cash paid for interest

   $ 27,034      $ 26,495   
                

See accompanying notes to condensed consolidated financial statements

 

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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 the adoption of FSP APB 14-1 (see “2.50% Convertible Subordinated Notes” in Note 8) and FSP EITF 03-6-1 (see “Earnings per Share” below), the Company adjusted comparative condensed consolidated statements of operations and statements of cash flows previously issued to reflect changes in accounting principles (see Note 2).

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 months ended June 30, 2009.

Earnings per Share

In April 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 applies to the calculation of earnings per share (“EPS”) under SFAS No. 128, “Earnings Per-Share” (“SFAS 128”) for share-based payment awards with rights to dividends or dividend equivalents. All prior-period EPS data presented shall be adjusted retrospectively to conform to the provisions of FSP EITF 03-6-1. FSP EITF 03-6-1 was effective for the Company beginning January 1, 2009. FSP EITF 03-6-1 did not have a significant impact on the Company’s historical EPS calculations.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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
June 30,
   Six months ended
June 30,
     2009    2008    2009    2008

Numerator:

           

Numerator for basic earnings per share

   $ 17,440    $ 708    $ 32,897    $ 4,505
                           

Effect of assumed conversion of convertible debt:

           

Interest expense, net of tax

     —        —        22      —  
                           

Numerator for diluted earnings per share

   $ 17,440    $ 708    $ 32,919    $ 4,505
                           

Denominator:

           

Weighted-average shares

     38,152      36,964      38,007      36,827
                           

Effect of dilutive securities:

           

Convertible subordinated debentures

     367      —        426      —  

Employee equity awards

     799      1,004      575      891
                           

Total dilutive potential shares

     1,166      1,004      1,001      891
                           

Denominator for diluted earnings per share

     39,318      37,968      39,008      37,718
                           

Earnings per share:

           

Basic

   $ 0.46    $ 0.02    $ 0.87    $ 0.12
                           

Diluted

   $ 0.44    $ 0.02    $ 0.84    $ 0.12
                           

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

 

     Three months ended
June 30,
   Six months ended
June 30,
     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

   1,072    —      539    —  

Common stock warrants

   1    1    1    1

Common stock related to employee equity awards

   1,192    1,151    2,028    1,376
                   
   7,442    7,145    7,745    7,370
                   

Income Taxes

The Company’s effective tax rates were 40.7% and 4.5% for the six months ended June 30, 2009 and 2008, respectively. The effective tax rate for the six months ended June 30, 2009 is substantially higher than the effective tax rate for the same period of 2008, as well as the effective tax rate for the full financial year of 2008, primarily as a result of the Company’s 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

As a result of the adoption of SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”) 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 SFAS 141(R) will benefit the Company’s consolidated statements of operations at the time such recognition occurs.

Interest Charges

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

 

     Three months ended
June 30,
   Six months ended
June 30,
     2009    2008    2009    2008

Interest expense

   $ 15,912    $ 14,313    $ 29,363    $ 29,508

Interest capitalized

     3,810      2,681      7,769      4,667
                           

Interest charges incurred

   $ 19,722    $ 16,994    $ 37,132    $ 34,175
                           

Fair Value of Financial Instruments

In April 2009, the Company adopted FASB Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”) for its interim period ended June 30, 2009. FSP FAS 107-1 and APB 28-1 requires disclosures about fair value of financial instruments as defined by SFAS No. 107, “Disclosures About Fair Value of Financial Instruments” (“SFAS 107”), for interim reporting periods of publicly traded companies as well as in annual financial statements.

The carrying value amounts 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     June 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

     217,635      206,906      212,524      128,552

3.00% convertible subordinated notes

     395,986      322,644      395,986      251,451

4.75% convertible subordinated notes

     269,510      274,612      —        —  
                           
   $ 883,131    $ 804,162    $ 627,660    $ 399,293
                           
Mortgage and Loans Payable:            

Mortgage payable

   $ 93,075    $ 95,674    $ 94,362    $ 80,221

Chicago IBX financing

     109,991      109,706      109,991      103,184

Asia-Pacific financing

     76,848      71,556      87,009      77,382

European financing

     133,986      112,259      130,981      96,853

Other note payable

     4,925      4,925      9,672      9,672

Netherlands financing

     5,779      5,427      6,485      6,485
                           
   $ 424,604    $ 399,547    $ 438,500    $ 373,797
                           

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
June 30,
   Six months ended
June 30,
     2009    2008    2009    2008

Cost of revenues

   $ 1,458    $ 1,208    $ 2,552    $ 2,178

Sales and marketing

     2,838      2,753      5,018      5,054

General and administrative

     9,163      13,087      17,427      22,157
                           
   $ 13,459    $ 17,048    $ 24,997    $ 29,389
                           

Recent Accounting Pronouncements

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS 165 will be effective for interim and annual financial periods ending after June 15, 2009. The Company adopted SFAS 165 during the three months ended June 30, 2009 and evaluated subsequent events through the issuance date of the financial statements. SFAS 165 did not have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162” (“SFAS 168”). SFAS 168 establishes the FASB Accounting Standards Codification™ to become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168,

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. The Company expects to adopt SFAS 168 during the three months ended September 30, 2009 and is currently evaluating the impact that this adoption will have on its consolidated financial statements.

2. Changes in Accounting Principle

The Company followed the guidance on a change of accounting principle under SFAS No. 154, “Accounting Changes and Error Corrections” to reflect the impact of the adoption of FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) (see “2.50% Convertible Subordinated Notes” in Note 8), which was effective January 1, 2009 (the adoption of FSP EITF 03-6-1 had an insignificant impact, see Note 1). As a result of these adoptions, 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 six months ended June 30, 2008 and condensed consolidated statement of cash flows for the six months ended June 30, 2008 were affected by the changes in accounting principle:

Condensed Consolidated Statement of Operations

 

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

Revenues

   $ 172,044      $ 172,044      $ —     
                        

Costs and operating expenses:

      

Cost of revenues

     102,008        102,039        31   

Sales and marketing

     15,290        15,290        —     

General and administrative

     41,445        41,445        —     
                        

Total costs and operating expenses

     158,743        158,774        31   
                        

Income from operations

     13,301        13,270        (31

Interest income

     2,411        2,411        —     

Interest expense

     (12,823     (14,313     (1,490

Other income (expense)

     (918     (918     —     
                        

Income before income taxes

     1,971        450        (1,521
                        

Income tax benefit

     258        258        —     
                        

Net income

   $ 2,229      $ 708      $ (1,521
                        

Earnings per share:

      

Basic earnings per share

   $ 0.06      $ 0.02      $ (0.04
                        

Diluted earnings per share

   $ 0.06      $ 0.02      $ (0.04
                        

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

     Six Months Ended
June 30, 2008
 
     As Originally
Reported
    As Adjusted     Effect of
Change
 

Revenues

   $ 330,262      $ 330,262      $ —     
                        

Costs and operating expenses:

      

Cost of revenues

     196,494        196,548        54   

Sales and marketing

     30,641        30,641        —     

General and administrative

     75,821        75,821        —     
                        

Total costs and operating expenses

     302,956        303,010        54   
                        

Income from operations

     27,306        27,252        (54

Interest income

     5,852        5,852        —     

Interest expense

     (26,417     (29,508     (3,091

Other income (expense)

     1,122        1,122        —     
                        

Income before income taxes

     7,863        4,718        (3,145
                        

Income tax expense

     (213     (213     —     
                        

Net income

   $ 7,650      $ 4,505      $ (3,145
                        

Earnings per share:

      

Basic earnings per share

   $ 0.21      $ 0.12      $ (0.09
                        

Diluted earnings per share

   $ 0.20      $ 0.12      $ (0.08
                        

As a result of the Company’s adoption of FSP APB 14-1, the most significant impact to the Company’s financial results for the three and six months ended June 30, 2009 was an increase to interest expense of $2,510,000 and $4,939,000, respectively.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Condensed Consolidated Statement of Cash Flows

 

     Six Months Ended
June 30, 2008
 
     As Originally
Reported
    As Adjusted     Effect of
Change
 

Cash flows from operating activities:

      

Net income

   $ 7,650      $ 4,505      $ (3,145

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

      

Depreciation

     70,207        70,261        54   

Stock-based compensation

     29,389        29,389        —     

Amortization of intangibles

     3,546        3,546        —     

Amortization of debt issuance costs and debt discount

     2,581        5,672        3,091   

Accretion of asset retirement obligation and accrued restructuring charges

     825        825        —     

Other items

     (740     (740     —     

Changes in operating assets and liabilities:

      

Accounts receivable

     (1,531     (1,531     —     

Other assets

     719        719        —     

Accounts payable and accrued expenses

     5,537        5,537        —     

Accrued restructuring charges

     (1,440     (1,440     —     

Other liabilities

     11,199        11,199        —     
                        

Net cash provided by operating activities

     127,942        127,942        —     

Net cash used in investing activities

     (352,415     (352,415     —     

Net cash provided by financing activities

     86,522        86,522        —     

Effect of foreign currency exchange rates on cash and cash equivalents

     (1,555     (1,555     —     
                        

Net decrease in cash and cash equivalents

     (139,506     (139,506     —     
                        

Cash and cash equivalents at beginning of period

     290,633        290,633        —     
                        

Cash and cash equivalents at end of period

   $ 151,127      $ 151,127      $ —     
                        

3. IBX Acquisitions and Expansions

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 $40,996,000 (using the exchange rate as of June 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 January 2010. In January 2009, the landlord commenced construction of the building that the Company will ultimately lease. Pursuant to the provisions of EITF 97-10, “The Effect of Lessee Involvement in Asset Construction” and EITF 96-21, “Implementation Issues in 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 December 2009. In connection with the London IBX Building Financing, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $7,624,000 (using the exchange rate as of June 30, 2009), representing the estimated percentage-of-completion of the building as of June 30, 2009.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4. Fair Value Measurements

In April 2009, the Company adopted FASB Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”) for its interim period ended June 30, 2009. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), when the volume and level of activity for the asset or liability have significantly decreased. FSP FAS 157-4 also includes guidance on identifying circumstances that indicate a transaction is not orderly. This adoption did not have any significant impact on the Company’s consolidated financial statements.

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

 

     Fair value at
June 30,

2009
    Fair value measurement using
     Level 1    Level 2     Level 3

Assets:

         

U.S. Government and Agency obligations

   $ 446,096      $ —      $ 446,096      $ —  

Money markets

     124,281        124,281      —          —  

Reserve

     897        —        —          897

Corporate bonds

     20,982        —        20,982        —  

Asset-backed securities

     9,950        —        9,950        —  

Other securities

     1,164        —        1,164        —  

Derivative assets (1)

     1,744        —        1,744        —  
                             
   $ 605,114      $ 124,281    $ 479,936      $ 897
                             

Liabilities:

         

Derivative liabilities (2)

     (11,831     —        (11,831     —  
                             
   $ (11,831   $ —      $ (11,831   $ —  
                             

 

(1) Included in the condensed consolidated balance sheets within other current assets.
(2) 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 six months ended June 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 June 30, 2009

   $ 897   
        

 

  

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

  

In January 2009, the Company adopted SFAS 157 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 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”;

 

   

Indefinite-lived intangible assets measured at fair value for impairment assessment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”;

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

   

Nonfinancial long-lived assets or asset groups measured at fair value for impairment assessment or disposal under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets;

 

   

Asset retirement obligations initially measured at fair value under SFAS No. 143, “Accounting for Asset Retirement Obligations” ; and

 

   

Nonfinancial liabilities associated with exit or disposal activities initially measured at fair value under SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”

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

During the three and six months ended June 30, 2009, there were no impairment charges recorded in connection with the Company’s goodwill and long-lived assets. The Company performs impairment tests for 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 is scheduled to be tested for impairment in the third quarter of 2009 and its Asia-Pacific reporting unit in the fourth quarter of 2009. 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 three and six months ended June 30, 2009, the Company recorded new asset retirement obligations and recorded a reduction to its restructuring charge; however, the amounts for both of these items were not significant.

5. Derivatives and Hedging Activities

The Company follows SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS 133”), and other related pronouncements for its derivative 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 June 30, 2009, the Company had a total of six outstanding interest rate swap instruments with expiration dates ranging from August 2009 to May 2011 as follows (in thousands):

 

     Notional
Amount
   Fair
Value (1)
    Loss (2)  

Liabilities:

       

European Financing interest rate swaps

   $ 108,372    $ (6,124   $ (6,062

Chicago IBX Financing interest rate swap

     105,000      (4,137     (4,137
                       
   $ 213,372    $ (10,261   $ (10,200
                       
 
  (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).

As of June 30, 2008, the Company had the same six interest rate swaps in place as follows (in thousands):

 

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

Assets:

       

European Financing interest rate swaps

   $ 127,192    $ 1,574      $ 1,316   

Liabilities:

       

Chicago IBX Financing interest rate swap

     105,000      (77     (77
                       
   $ 232,192    $ 1,497      $ 1,239   
                       
 
  (1) Included in the condensed consolidated balance sheets within other assets or 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 June 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 SFAS 133. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and six months ended June 30, 2009. As of June 30, 2009, the Company had gross assets totaling $2,097,000 and gross liabilities totaling $1,923,000 representing the fair values of these foreign currency forward contracts. The Company records its foreign currency forward contracts within other current assets and other current liabilities. During the three and six months ended June 30, 2009, the Company recognized a net loss of $1,535,000 and $1,359,000, respectively, in connection with its foreign currency forward contracts, which is reflected in other income (expense) on the accompanying statement of operations. During the three and six months ended June 30, 2008, the Company recognized a net gain of $237,000 in connection with its foreign currency forward contracts, which is reflected in other income (expense) on the accompanying 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 six months ended June 30, 2009, revenues recognized from related parties were $5,843,000 and $11,654,000, respectively. For the three and six months ended June 30, 2008, revenues recognized from related parties were $5,505,000 and $7,604,000, respectively. As of June 30, 2009 and 2008, accounts receivable with these related parties were $4,199,000 and $4,653,000, respectively. For the three and six months ended June 30, 2009, costs and services procured from related parties were $153,000 and $299,000, respectively. For the three and six months ended June 30, 2008, costs and services procured from related parties were $760,000 and $1,515,000, respectively. As of June 30, 2009 and 2008, accounts payable with these related parties were $33,000 and $115,000, 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):

 

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

U.S. Government and Agency obligations

   $ 445,921      $ 184      $ (9   $ 446,096   

Money markets

     124,281        —          —          124,281   

Reserve

     897        —          —          897   

Corporate bonds

     20,739        270        (27     20,982   

Asset-backed securities

     9,816        150        (16     9,950   

Other securities

     1,154        10        —          1,164   
                                

Total available-for-sale securities

     602,808        614        (52     603,370   

Less amounts classified as cash and cash equivalents

     (405,221     —          4        (405,217
                                

Total securities classified as investments

     197,587        614        (48     198,153   

Less amounts classified as short-term investments

     (175,713     (174     33        (175,854
                                

Total market value of long-term investments

   $ 21,874      $ 440      $ (15   $ 22,299   
                                

 

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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 June 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 June 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 June 30, 2009 and December 31, 2008.

In April 2009, the Company adopted FASB Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”) for its interim period ended June 30, 2009. As a result of this adoption, the Company reclassified a previously-recorded other-than-temporary impairment loss of $2,687,000 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 for the six months ended June 30, 2009. There were no other-than-temporary impairments recorded in other comprehensive income (loss).

During the six months ended June 30, 2009, the Company received additional distributions of $5,666,000 from the Reserve. During the six months ended June 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. As of June 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.

 

17


Table of Contents

EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table summarizes the fair value and gross unrealized losses related to 18 available-for-sale securities with an aggregate cost basis of $316,389,000, aggregated by type of investment and length of time that individual securities have been in continuous unrealized loss position, as of June 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

   $ 310,750    $ (9   $ —      $ —  

Corporate bonds

     3,742      (27     —        —  

Asset-backed securities

     1,897      (16     —        —  
                            
   $ 316,389    $ (52   $ —      $ —  
                            

While 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 June 30, 2009, the Company’s investments are subject to the currently adverse market conditions, which include constraints related to liquidity. If market conditions continue to deteriorate and liquidity constraints become even more pronounced, the Company could sustain other-than-temporary impairments to its investment portfolio which could result in additional losses being recorded. In addition, securities markets could become inactive which could affect the liquidity of the Company’s investments. As securities mature, the Company has reinvested the 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 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):

 

     June 30,
2009
    December 31,
2008
 

Accounts receivable

   $ 125,836      $ 119,030   

Unearned revenue

     (56,304     (50,964

Allowance for doubtful accounts

     (2,220     (2,037
                
   $ 67,312      $ 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Other Current Assets

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

 

     June 30,
2009
   December 31,
2008

Prepaid expenses

   $ 11,584    $ 9,550

Taxes receivable

     7,248      3,434

Foreign currency forward contract receivable

     1,744      377

Debt issuance costs, net

     —        18

Other current assets

     1,505      1,848
             
   $ 22,081    $ 15,227
             

Property, Plant and Equipment

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

 

     June 30,
2009
    December 31,
2008
 

IBX plant and machinery

   $ 777,399      $ 651,820   

Leasehold improvements

     520,238        472,872   

Site improvements

     222,525        217,200   

Buildings

     203,980        196,009   

IBX equipment

     156,528        147,832   

Computer equipment and software

     77,056        74,179   

Land

     49,640        48,950   

Furniture and fixtures

     10,356        9,866   

Construction in progress

     263,297        277,208   
                
     2,281,019        2,095,936   

Less accumulated depreciation

     (690,263     (603,106
                
   $ 1,590,756      $ 1,492,830   
                

Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated $79,805,000 and $80,239,000 at June 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 $13,118,000 and $9,814,000 as of June 30, 2009 and 2008, respectively.

As of June 30, 2009 and December 31, 2008, the Company had accrued property, plant and equipment expenditures of $59,773,000 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.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Goodwill and Other Intangible Assets

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

 

     June 30,
2009
    December 31,
2008
 

Goodwill:

    

Europe

   $ 364,176      $ 324,674   

Asia-Pacific

     17,936        18,155   
                
     382,112        342,829   

Other intangibles:

    

Intangible asset – customer contracts

     64,652        58,605   

Intangible asset – leases

     4,748        4,349   

Intangible asset – others

     1,616        755   
                
     71,016        63,709   

Accumulated amortization

     (16,397     (12,791
                
     54,619        50,918   
                
   $ 436,731      $ 393,747   
                

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 due to foreign exchange rate changes. 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 six months ended June 30, 2009, the Company recorded amortization expense of $1,370,000 and $2,646,000, respectively, associated with its other intangible assets. For the three and six months ended June 30, 2008, the Company recorded amortization expense of $1,771,000 and $3,546,000, respectively, associated with its other intangible assets. Estimated future amortization expense related to these intangibles is as follows (in thousands):

 

Year ending:

  

2009 (six months remaining)

   $ 2,907

2010

     5,889

2011

     5,793

2012

     5,777

2013

     5,777

2014 and thereafter

     28,476
      

Total

   $ 54,619
      

Other Assets

Other assets consisted of the following (in thousands):

 

     June 30,
2009
   December 31,
2008

Deposits

   $ 29,634    $ 21,485

Debt issuance costs, net

     21,421      16,216

Restricted cash

     4,905      14,934

Prepaid expenses

     3,675      3,874

Other assets

     1,152      1,285
             
   $ 60,787    $ 57,794
             

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Accounts Payable and Accrued Expenses

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

 

     June 30,
2009
   December 31,
2008

Accounts payable

   $ 16,565    $ 18,325

Accrued compensation and benefits

     23,573      22,135

Accrued taxes

     17,594      8,640

Accrued utilities and security

     14,442      10,327

Accrued interest

     6,416      5,962

Accrued professional fees

     2,530      2,741

Accrued other

     7,334      6,187
             
   $ 88,454    $ 74,317
             

Other Current Liabilities

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

 

     June 30,
2009
   December 31,
2008

Deferred installation revenue

   $ 24,570    $ 22,769

Deferred tax liabilities

     7,342      7,342

Customer deposits

     6,028      5,913

Deferred recurring revenue

     3,917      4,434

Accrued restructuring charges

     1,832      6,023

Foreign currency forward contract payable

     1,570      2,072

Deferred rent

     296      495

Interest rate swap payable

     115      271

Other current liabilities

     589      1,136
             
   $ 46,259    $ 50,455
             

Other Liabilities

Other liabilities consisted of the following (in thousands):

 

     June 30,
2009
   December 31,
2008

Deferred rent, non-current

   $ 30,392    $ 28,146

Deferred tax liabilities

     13,005      16,531

Deferred installation revenue, non-current

     19,000      12,083

Asset retirement obligations

     13,117      12,264

Interest rate swap payable, non-current

     10,146      10,631

Customer deposits, non-current

     7,102      6,108

Deferred recurring revenue, non-current

     5,397      6,180

Accrued restructuring charges, non-current

     4,728      7,288

Other liabilities

     1,067      864
             
   $ 103,954    $ 100,095
             

The Company currently leases the majority of its IBX centers and certain equipment under non-cancelable operating lease agreements expiring through 2029. 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 rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

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 as of June 30, 2009 (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 June 30, 2009, the 4.75% Convertible Subordinated Notes were convertible into 4,432,638 shares of the Company’s common stock.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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.

Under FSP APB 14-1, 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 in EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Common Stock” (“EITF 00-19”) and EITF Issue No. 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”).

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 $7,149,000 as of June 30, 2009 and equity issuance costs were $2,807,000. 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):

 

     June 30,
2009
 

Equity component (1)

   $ 104,794   
        

Liability component :

  

Principal

   $ 373,750   

Less: debt discount, net (2)

     (104,240
        

Net carrying amount

   $ 269,510   
        

 

  

(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 June 30, 2009, the remaining life of the 4.75% Convertible Subordinated Notes was 7.0 years.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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

 

     Three months
ended

June 30, 2009
 

Contractual interest expense

   $ 937   

Amortization of debt issuance costs

     54   

Amortization of debt discount

     554   
        
   $ 1,545   
        

Effective interest rate of the liability component

     10.88

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 three months ended June 30, 2009, and the remaining $49,645,000 was recorded in additional paid-in capital pursuant to EITF 00-19 and EITF 07-5.

2.50% Convertible Subordinated Notes

In January 2009, the Company adopted FSP APB 14-1. FSP APB 14-1 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 FSP APB 14-1 due to the Company’s ability to elect to repay the 2.50% Convertible Subordinated Notes in cash. FSP APB 14-1 did not impact the Company’s other convertible debt instruments that were outstanding as of January 1, 2009. FSP APB 14-1 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 June 30, 2009, the 2.50% Convertible Subordinated Notes were convertible into 2,231,475 shares of the Company’s common stock.

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 SFAS 133. Under FSP APB 14-1, 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. 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 in EITF 00-19.

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):

 

     June 30,
2009
    December 31,
2008
 

Equity component (1)

   $ 53,991      $ 53,991   
                

Liability component :

    

Principal

   $ 250,000      $ 250,000   

Less: debt discount, net (2)

     (32,365     (37,476
                

Net carrying amount

   $ 217,635      $ 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 June 30, 2009, the remaining life of the 2.50% Convertible Subordinated Notes was 2.79 years.

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009     2008     2009     2008  

Contractual interest expense

   $ 1,563      $ 1,563      $ 3,125      $ 3,125   

Amortization of debt issuance costs

     311        313        623        627   

Amortization of debt discount

     2,595        2,406        5,110        4,736   
                                
   $ 4,469      $ 4,282      $ 8,858      $ 8,488   
                                

Effective interest rate of the liability component

     8.37     8.37     8.37     8.37

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

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

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 June 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 six months ended June 30, 2009, the Company issued six irrevocable letters of credit totaling $11,392,000 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 $13,608,000 as of June 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 June 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 June 30, 2009, a total of $5,779,000 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 June 30, 2009 were as follows (in thousands):

 

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

2009 (six months remaining)

   $ —        $ 26,747      $ 8,249      $ 34,996   

2010

     —          50,769        16,623        67,392   

2011

     —          48,917        18,558        67,475   

2012

     250,000        139,551 (3)      18,418        407,969   

2013

     —          29,919        18,506        48,425   

2014 and thereafter

     769,736        128,701        176,559        1,074,996   
                                
     1,019,736        424,604        256,913        1,701,253   

Less amount representing interest

     —          —          (132,251     (132,251

Less amount representing debt discount

     (136,605     —          —          (136,605

Less amount representing remaining estimated building costs

     —          —          (8,561     (8,561

Plus amount representing residual property value

     —          —          28,467        28,467   
                                
     883,131        424,604        144,568        1,452,303   

Less current portion of principal

     —          (52,113     (6,036     (58,149
                                
   $ 883,131      $ 372,491      $ 138,532      $ 1,394,154   
                                

 

(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.

At the court’s request, Plaintiffs selected six “focus” cases, which do not include the Company. The court indicated that its decisions in the six focus cases are intended to provide strong guidance for the parties in the remaining cases. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. On September 27, 2007, the plaintiffs moved to certify a class in these six cases. On November 14, 2007, the defendants in the six focus cases filed motions to dismiss the amended complaints. On March 26, 2008, the court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

purchased outside the previously certified class period. With respect to all other claims, the motions to dismiss were denied. On October 10, 2008, at the request of plaintiffs, plaintiffs’ motion for class certification was withdrawn, without prejudice. On April 3, 2009, the plaintiffs submitted to the court a motion for preliminary approval of a settlement of the approximately 300 coordinated cases, which includes the Company, the underwriter defendants in the Company’s class action lawsuit, and the plaintiff class in the Company’s class action lawsuit. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including the Company. On June 11, 2009, the court issued an order preliminarily approving the proposed stipulation and agreement of settlement among the parties and certifying settlement classes. The settlement is subject to termination by the parties under certain circumstances and final approval by the Court. There is no assurance that the court will grant final approval.

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. The court has not yet ruled on any of 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 litigations 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 June 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 June 30, 2009, the Company was contractually committed for $62,204,000 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 June 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 $70,512,000 as of June 30, 2009.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

10. Other Comprehensive Income and Loss

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2009    2008     2009    2008  

Net income

   $ 17,440    $ 708      $ 32,897    $ 4,505   

Unrealized gain (loss) on available for sale securities, net of tax of $118, $0, $406 and $0, respectively

     163      (443     557      (247

Unrealized gain on interest rate swaps, net of tax of $517, $0, $371 and $0, respectively

     713      1,239        439      1,239   

Foreign currency translation gain

     73,075      3,265        58,283      6,736   
                              

Comprehensive income

   $ 91,391    $ 4,769      $ 92,176    $ 12,233   
                              

During the three months ended June 30, 2009, the U.S. dollar weakened relative to certain of the currencies of the foreign countries in which the Company operates. This has significantly impacted the Company’s consolidated balance sheets (as evidenced above in the Company’s foreign currency translation gain), as well as its consolidated results of operations as amounts in foreign currencies are generally translating into more U.S. dollars.

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
June 30,
    Six months ended
June 30,
 
     2009    2008     2009    2008  

Total revenues:

          

United States

   $ 129,746    $ 107,247      $ 254,640    $ 206,443   

Europe

     55,056      44,193        102,856      85,042   

Asia-Pacific

     28,366      20,604        54,903      38,777   
                              
   $ 213,168    $ 172,044      $ 412,399    $ 330,262   
                              

Total depreciation and amortization:

          

United States

   $ 26,995    $ 24,276      $ 52,844    $ 47,143   

Europe

     11,203      9,665        20,768      18,721   

Asia-Pacific

     6,693      4,384        12,955      7,943   
                              
   $ 44,891    $ 38,325      $ 86,567    $ 73,807   
                              

Income (loss) from operations:

          

United States

   $ 28,748    $ 15,279      $ 62,689    $ 28,534   

Europe

     7,887      (3,147     13,313      (3,095

Asia-Pacific

     4,394      1,138        8,733      1,813   
                              
   $ 41,029    $ 13,270      $ 84,735    $ 27,252   
                              

Capital expenditures:

          

United States

   $ 30,565    $ 33,803      $ 70,351    $ 92,881   

Europe

     22,418      22,600        46,514      98,250 (1) 

Asia-Pacific

     23,833      28,055        34,920      42,211   
                              
   $ 76,816    $ 84,458      $ 151,785    $ 233,342   
                              

 

(1) 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):

 

     June 30,
2009
   December 31,
2008

United States

   $ 1,063,848    $ 1,043,504

Europe

     362,609      309,655

Asia-Pacific

     164,299      139,671
             
   $ 1,590,756    $ 1,492,830
             

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

 

     Three months ended
June 30,
   Six months ended
June 30,
     2009    2008    2009    2008

Colocation

   $ 171,809    $ 132,974    $ 330,258    $ 254,323

Interconnection

     25,897      23,392      51,094      45,540

Managed infrastructure

     7,368      6,833      14,745      13,333

Rental

     239      196      503      558
                           

Recurring revenues

     205,313      163,395      396,600      313,754

Non-recurring revenues

     7,855      8,649      15,799      16,508
                           
   $ 213,168    $ 172,044    $ 412,399    $ 330,262
                           

 

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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 six months ended June 30, 2009 and 2008. No single customer accounted for 10% or greater of the Company’s gross accounts receivable as of June 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 the 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 2004 accrued restructuring charges from December 31, 2008 to June 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
June 30,
2009
 

Estimated lease exit costs

   $ 13,311      $ 241    $ (6,053   $ (939   $ 6,560   
                                       
     13,311      $ 241    $ (6,053   $ (939     6,560   
                           

Less current portion

     (6,023            (1,832
                       
   $ 7,288             $ 4,728   
                       

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 June 30, 2009 and December 31, 2008. The Company is contractually committed to this excess space lease through 2015.

13. Subsequent Events

In July 2009, a wholly-owned subsidiary of the Company entered into a lease agreement for data center space in Chicago, Illinois. The lease agreement has a fixed term of 12 years, with options to extend for up to an additional 15 years, in five-year increments, and a total rent obligation of approximately $91,112,000 over the lease term, which does not include any rent obligation for the extension periods.

In July 2009, a wholly-owned subsidiary of the Company acquired all of the issued and outstanding shares of Upminster GmbH (“Upminster”), a company which owns a data center and the real estate on which it is situated in Frankfurt, Germany, which is not currently operational, for a cash payment of approximately 20,048,000 million Euros or approximately $28,133,000 (the “Upminster Acquisition”), excluding closing costs and subject to adjustment as outlined in the Share Purchase Agreement. The combined company will operate under the Equinix name. The Company intends to further invest up to approximately $10,000,000 to complete the first phase of the data center to make it operational. The Company will have the option to build out a second and final phase of this data center at a later date. The Upminster Acquisition will be accounted for using the purchase method of accounting in accordance with SFAS No. 141(R), “Business Combinations.”

 

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EQUINIX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company has evaluated subsequent events through July 29, 2009, which is the date the 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 June 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 FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”) and FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). 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.

Overview

Equinix provides network-neutral colocation, interconnection and managed services to global enterprises, content providers, financial companies and the world’s largest network service providers. As of June 30, 2009, we operated IBX centers in the Chicago, Dallas, Los Angeles, New York, Silicon 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.

Direct interconnection to our aggregation of networks, which serve more than 90% of the world’s Internet routes, allows our customers to increase performance while significantly reducing costs. Based on our network-neutral model 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 do so as well to gain the full economic and performance benefits of direct interconnection. These partners, in turn, pull in their business partners, creating a “network effect” of customer adoption. Our interconnection services enable scalable, reliable and cost-effective 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 network effect. This critical mass and the resulting network effect, combined with our strong financial position, continue to drive new customer growth and bookings.

 

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Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services with their colocation offerings. Each of these colocation providers own and operate a network. We do not own or operate a network, yet have greater than 300 networks operating out of our IBX centers. As a result, we are able to offer our customers a substantial choice of networks given our network neutrality thereby allowing our customers to choose from numerous network service providers. We believe this is a distinct and sustainable competitive advantage.

Our customer count increased to 2,430 as of June 30, 2009 versus 2,090 as of June 30, 2008, an increase of 16%. 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 83% as of June 30, 2009 versus approximately 76% as of June 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 88% as of June 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. 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 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.

 

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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 six months ended June 30, 2008 include the operations of Virtu from February 5, 2008 to June 30, 2008.

Three Months Ended June 30, 2009 and 2008

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

 

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

U.S:

              

Recurring revenues

   $ 126,933    60   $ 103,779    60   $ 23,154      22

Non-recurring revenues

     2,813    1     3,468    2     (655   (19 )% 
                                    
     129,746    61     107,247    62     22,499      21
                                    

Europe:

              

Recurring revenues

     51,427    24     40,958    24     10,469      26

Non-recurring revenues

     3,629    2     3,235    2     394      12
                                    
     55,056    26     44,193    26     10,863      25
                                    

Asia-Pacific:

              

Recurring revenues

     26,953    12     18,658    11     8,295      44

Non-recurring revenues

     1,413    1     1,946    1     (533   (27 )% 
                                    
     28,366    13     20,604    12     7,762      38
                                    

Total:

              

Recurring revenues

     205,313    96     163,395    95     41,918      26

Non-recurring revenues

     7,855    4     8,649    5     (794   (9 )% 
                                    
   $ 213,168    100   $ 172,044    100   $ 41,124      24
                                    

 

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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 June 30, 2009, we recorded approximately $12.7 million of revenue generated from our recently-opened IBX centers or IBX center expansions in the New York, Silicon Valley and Washington, D.C. 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 and New York metro areas, all of which are expected to open during the remainder of 2009 and 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 three months ended June 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, which was primarily generated from our recently-opened 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 center expansions and additional expansions currently taking place in the Frankfurt, London, Paris 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 three months ended June 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 June 30, 2009, we recorded approximately $6.0 million of revenue generated from our IBX center expansions in the Hong Kong, Singapore, Sydney and Tokyo 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 center expansions and additional expansion currently taking place in the Hong Kong and Singapore metro areas which are expected to open during the remainder of 2009.

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

 

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

U.S.

   $ 66,667    56   $ 57,019    56   $ 9,648    17

Europe

     34,598    29     31,660    31     2,938    9

Asia-Pacific

     17,269    15     13,360    13     3,909    29
                                   

Total

   $ 118,534    100   $ 102,039    100   $ 16,495    16
                                   

 

     Three months ended
June 30,
 
     2009     2008  

Cost of revenues as a percentage of revenues:

    

U.S.

   51   53

Europe

   63   72

Asia-Pacific

   61   65

Total

   56   59

U.S. Cost of Revenues. U.S. cost of revenues for the three months ended June 30, 2009 and 2008 included $25.3 million and $22.1 million, respectively, of depreciation expense. Growth in depreciation expense was due to our IBX center expansion activity. Excluding depreciation, the increase in U.S. cost of

 

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revenues was primarily due to overall growth related to our revenue growth and costs associated with our expansion projects, including an increase of $3.5 million in utility costs as a result of increased customer installations and an increase of $1.7 million in rent and facility costs. We anticipate that our U.S. cost of revenues will continue to increase in the foreseeable future to the extent that the occupancy levels in our U.S. IBX centers increase and as our recently-opened IBX centers or IBX center expansions commence operations more fully during the remainder of 2009 and from our additional expansion activity currently taking place in the Chicago, Los Angeles and New York metro areas. 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 June 30, 2009 and 2008 included $9.6 million and $7.8 million, respectively, of depreciation expense. Growth in depreciation expense was due to our IBX center expansion activity. Excluding depreciation expense, our Europe cost of revenues did not change significantly. 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 June 30, 2009 and 2008 included $6.5 million and $4.3 million, respectively, of depreciation expense. Growth in depreciation expense was due to our IBX center expansion activity. 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 $1.2 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 three months ended June 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

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

U.S.

   $ 9,330    57   $ 8,527    55   $ 803    9

Europe

     4,728    29     4,572    30     156    3

Asia-Pacific

     2,311    14     2,191    15     120    5
                                   

Total

   $ 16,369    100   $ 15,290    100   $ 1,079    7
                                   

 

     Three months ended
June 30,
 
     2009     2008  

Sales and marketing expenses as a percentage of revenues:

    

U.S.

   7   8

Europe

   9   10

Asia-Pacific

   8   11

Total

   8   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. Our Asia-Pacific sales and marketing expenses did not change significantly. 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 three months ended June 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

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

U.S.

   $ 25,221    67   $ 26,422    64   $ (1,201   (5 )% 

Europe

     7,843    21     11,108    27     (3,265   (29 )% 

Asia-Pacific

     4,392    12     3,915    9     477      12
                                    

Total

   $ 37,456    100   $ 41,445    100   $ (3,989   (10 )% 
                                    

 

     Three months ended
June 30,
 
     2009     2008  

General and administrative expenses as a percentage of revenues:

    

U.S.

   19   25

Europe

   14   25

Asia-Pacific

   15   19

Total

   18   24

U.S. General and Administrative Expenses. Our U.S. general and administrative expenses did not change significantly. 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. Our Europe general and administrative expenses for the three months ended June 30, 2009 and 2008 included $1.1 million and $4.5 million, respectively, of stock-based compensation expense. During the three months ended June 30, 2008, we recognized 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. 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 legal fees related to a legal matter. 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 June 30, 2009, we recorded a reduction to restructuring charges of $220,000 from revised sublease assumptions on our excess space lease in the New York metro area. During the three months ended June 30, 2008 no restructuring charge was recorded.

Interest Income. Interest income decreased to $680,000 for the three months ended June 30, 2009 from $2.4 million for the three months ended June 30, 2008. Interest income decreased primarily due to lower yields on invested balances. The average yield for the three months ended June 30, 2009 was 0.48% versus 3.29% for the three months ended June 30, 2008. We expect our interest income to remain at these low levels for the foreseeable future due to low interest rates and as we continue to utilize our cash to finance our expansion activities.

Interest Expense. Interest expense increased to $15.9 million for the three months ended June 30, 2009 from $14.3 million for the three months ended June 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

 

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2008 and 2009 consisting of (i) our $373.8 million 4.75% convertible subordinated notes offering in June 2009 and (ii) our Asia-Pacific financing, of which $76.8 million was outstanding as of June 30, 2009 with an approximate blended interest rate of 2.86% per annum as compared to $50.3 million outstanding as of June 30, 2008 with an approximate blended interest rate of 3.35% per annum. The increase was partially offset by higher capitalized interest expense, repayment of some loans and the partial conversions of our convertible subordinated debentures in November 2008 and June 2009. During the three months ended June 30, 2009 and 2008, we capitalized $3.8 million and $2.7 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 as we complete expansion efforts and cease to capitalize interest expense.

Other Income (Expense). For the three months ended June 30, 2009, we recorded $2.6 million of other income, primarily attributable to foreign currency exchange gains during the period. For the three months ended June 30, 2008, we recorded $918,000 of other expense, primarily attributable to foreign currency exchange losses during the period.

Income Taxes. For the three months ended June 30, 2009, we recorded $11.0 million of income tax expense. The tax expense recorded in the three months ended June 30, 2009 was a result of applying the annual effective tax rates estimated for the year to the operating results in the period. For the three months ended June 30, 2008, we recorded $258,000 of income tax benefit attributable to our foreign operations. Our effective tax rates were 38.61% and (57.3%) for the three months ended June 30, 2009 and 2008, respectively. The increase in our effective tax rate (which was an income tax benefit in the prior period versus income tax expense in the current period) 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 the state 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 allowance.

Six Months Ended June 30, 2009 and 2008

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

 

     Six months ended June 30,     Change  
     2009    %     2008    %     $     %  

U.S:

              

Recurring revenues

   $ 248,183    60   $ 198,897    60   $ 49,286      25

Non-recurring revenues

     6,457    2     7,546    2     (1,089   (14 )% 
                                    
     254,640    62     206,443    62     48,197      23
                                    

Europe:

              

Recurring revenues

     96,415    23     79,191    24     17,224      22

Non-recurring revenues

     6,441    1     5,851    2     590      10
                                    
     102,856    24     85,042    26     17,814      21
                                    

Asia-Pacific:

              

Recurring revenues

     52,002    13     35,666    11     16,336      46

Non-recurring revenues

     2,901    1     3,111    1     (210   (7 )% 
                                    
     54,903    14     38,777    12     16,126      42
                                    

Total:

              

Recurring revenues

     396,600    96     313,754    95     82,846      26

Non-recurring revenues

     15,799    4     16,508    5     (709   (4 )% 
                                    
   $ 412,399    100   $ 330,262    100   $ 82,137      25
                                    

 

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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 six months ended June 30, 2009, we recorded approximately $24.5 million of revenue generated from our recently-opened IBX centers or IBX center expansions in the New York, Silicon Valley and Washington, D.C. 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 and New York metro areas, all of which are expected to open during the remainder of 2009 and 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 six months ended June 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, which was primarily generated from our recently-opened 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 center expansions and additional expansions currently taking place in the Amsterdam, Frankfurt, London, Paris 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 six months ended June 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 six months ended June 30, 2009, we recorded approximately $10.2 million of revenue generated from our IBX center expansions in the Hong Kong, Singapore, Sydney and Tokyo 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 center expansions and additional expansion currently taking place in the Hong Kong and Singapore metro areas which are expected to open during the remainder of 2009.

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

 

     Six months ended June 30,     Change  
     2009    %     2008    %     $    %  

U.S.

   $ 130,478    57   $ 111,889    57   $ 18,589    17

Europe

     66,440    28     59,881    30     6,559    11

Asia-Pacific

     33,421    15     24,778    13     8,643    35
                                   

Total

   $ 230,339    100   $ 196,548    100   $ 33,791    17
                                   

 

     Six months ended
June 30,
 
     2009     2008  

Cost of revenues as a percentage of revenues:

    

U.S.

   51   54

Europe

   65   70

Asia-Pacific

   61   64

Total

   56   60

U.S. Cost of Revenues. U.S. cost of revenues for the six months ended June 30, 2009 and 2008 included $49.5 million and $42.7 million, respectively, of depreciation expense. Growth in depreciation expense was 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

 

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expansion projects, including (i) an increase of $6.3 million in utility costs as a result of increased customer installations, (ii) an increase of $3.5 million in rent and facility costs and (iii) $2.5 million in higher compensation costs, primarily as a result of headcount growth (292 U.S. employees as of June 30, 2009 versus 265 as of June 30, 2008). We anticipate that our U.S. cost of revenues will continue to increase in the foreseeable future to the extent that the occupancy levels in our U.S. IBX centers increase and as our recently-opened IBX centers or IBX center expansions commence operations more fully during the remainder of 2009 and from our additional expansion activity currently taking place in the Chicago, Los Angeles and New York metro areas. 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 six months ended June 30, 2009 and 2008 included $17.7 million and $14.8 million, respectively, of depreciation expense. Growth in depreciation expense was due to our IBX center expansion activity. Excluding depreciation expense, the increase in Europe cost of revenues was primarily due to the overall growth in the region throughout most cost categories. 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 six months ended June 30, 2009 and 2008 included $12.6 million and $7.7 million, respectively, of depreciation expense. Growth in depreciation expense was due to our IBX center expansion activity. 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 $2.4 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 six months ended June 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     Change  
     2009    %     2008    %     $     %  

U.S.

   $ 17,464    57   $ 17,171    56   $ 293      2

Europe

     8,662    28     9,180    30     (518   (6 )% 

Asia-Pacific

     4,646    15     4,290    14     356      8
                                    

Total

   $ 30,772    100   $ 30,641    100   $ 131      0
                                    

 

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

U.S.

   7   8

Europe

   8   11

Asia-Pacific

   8   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. Our Asia-Pacific sales and marketing expenses did not change significantly. 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 six months ended June 30, 2009 and 2008 were split among the following geographic regions (dollars in thousands):

 

     Six months ended June 30,     Change  
     2009    %     2008    %     $     %  

U.S.

   $ 50,062    69   $ 48,849    64   $ 1,213      2

Europe

     14,441    20     19,076    25     (4,635   (24 )% 

Asia-Pacific

     8,103    11     7,896    11     207      3
                                    

Total

   $ 72,606    100   $ 75,821    100   $ (3,215   (4 )% 
                                    

 

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

U.S.

   20   24

Europe

   14   22

Asia-Pacific

   15   20

Total

   18   23

U.S. General and Administrative Expenses. Our U.S. general and administrative expenses did not change significantly. 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. Our Europe general and administrative expenses for the six months ended June 30, 2009 and 2008 included $2.2 million and $6.0 million, respectively, of stock-based compensation expense. During the three months ended June 30, 2008, we recognized 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. 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 six months ended June 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 six months ended June 30, 2008 no restructuring charge was recorded.

Interest Income. Interest income decreased to $1.6 million for the six months ended June 30, 2009 from $5.9 million for the six months ended June 30, 2008. Interest income decreased primarily due to lower yields on invested balances. The average yield for the six months ended June 30, 2009 was 0.72% versus 3.06% for the six months ended June 30, 2008. We expect our interest income to remain at these low levels for the foreseeable future due to low interest rates and as we continue to utilize our cash to finance our expansion activities.

 

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Interest Expense. Interest expense was $29.4 million and $29.5 million, respectively, for the six months ended June 30, 2009 and 2008. 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 as we complete expansion efforts and cease to capitalize interest expense.

Other-than-temporary impairment loss on investments. For the six months ended June 30, 2009, we recorded $2.7 million of 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 six months ended June 30, 2008, we did not record any other-than-temporary impairment loss on our investments.

Other Income (Expense). For the six months ended June 30, 2009 and 2008, we recorded $1.2 million and $1.1 million, respectively, of other income, primarily attributable to foreign currency exchange gains during the periods.

Income Taxes. For the six months ended June 30, 2009 and 2008, we recorded $22.6 million and $213,000, respectively, of income tax expense. The tax expense recorded in the six months ended June 30, 2009 was a result of applying the annual effective tax rates estimated for the year to the operating results in the period. The income tax expense recorded in the six months ended June 30, 2008 was attributable to our foreign operations. Our effective tax rates were 40.7% and 4.5% for the six months ended June 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 the state 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 allowance.

Liquidity and Capital Resources

As of June 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 $569.2 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 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 for at least the next 12 months. As of June 30, 2009, we had $603.4 million of cash, cash equivalents and short-term and long-term investments. If the current capital market conditions continue to deteriorate, we may suffer further losses on our investment portfolio, which could have a material adverse effect on our liquidity. 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 well diversified customer base with no concentration of credit risk with any single customer, we have a number of large customers in the financial services sector. Further, while we believe we have a strong customer base and have experienced strong collections in the past, if the current market conditions continue to deteriorate our customers may have difficulty paying us, we may experience increased churn in our customer base, and there may be reductions in their commitments to us, all of which could have a material adverse effect on our liquidity.

 

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As of June 30, 2009, we had a total of approximately $20.9 million of additional liquidity available to us, which consists of (i) $3.3 million under the European financing for general working capital purposes, (ii) $13.6 million under the $25.0 million Bank of America revolving credit line and (iii) $4.0 million under the Netherlands financing. Our indebtedness as of June 30, 2009, as noted above, consisted of $569.2 million of non-convertible senior debt, of which $245.5 million of this amount was held by a single lender. 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 June 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 continue to persist, or 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

 

     Six Months Ended
June 30,
 
     2009     2008  
     (in thousands)  

Net cash provided by operating activities

   $ 165,443      $ 127,942   

Net cash used in investing activities

     (281,945     (352,415

Net cash provided by financing activities

     297,716        86,522   

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.

Investing Activities. The decrease in net cash used in investing activities was primarily due to lower capital expenditures. During the six months ended June 30, 2009 and 2008, these capital expenditures were $151.8 million and $210.1 million, respectively. We expect that our IBX expansion activity 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 six months ended June 30, 2009 was primarily the result of $373.8 million in gross proceeds from our 4.75% convertible notes offering and proceeds from our 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 in June 2009. Net cash provided by financing activities during the six months ended June 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 June 30, 2009, the 4.75% convertible subordinated notes were convertible into 4.4 million shares of our common stock.

 

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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 $109.62 per share as of June 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 FSP APB 14-1. 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 June 30, 2009, there were no convertible subordinated debentures outstanding.

Netherlands Financing. In June 2009, our wholly-owned subsidiary in the Netherlands amended senior credit facilities totaling approximately 5.5 million Euros, 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 facilities. 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 June 30, 2009, a total of $5.8 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

 

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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 June 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 six months ended June 30, 2009, we entered into six irrevocable letters of credit totaling $11.4 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 $13.6 million as of June 30, 2009.

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 2029. The following represents our debt maturities, financings, leases and other contractual commitments as of June 30, 2009 (in thousands):

 

     2009
(6 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)

     15,376      30,752      26,892      3,828        —        —        76,848

European financing (1)

     4,425      15,788      17,558      21,027        25,452      49,736      133,986

Netherlands financing (1)

     702      1,403      1,403      1,403        868      —        5,779

Interest (2)

     26,551      51,999      44,771      33,776        31,121      53,582      241,800

Mortgage payable (3)

     5,082      10,164      10,164      10,164        10,165      123,339      169,078

Other note payable (3)

     5,000      —        —        —          —        —        5,000

Capital lease and other financing
obligations (3)

     8,249      16,623      18,558      18,418        18,506      176,559      256,913

Operating leases under accrued restructuring
charges (3)

     1,202      2,193      2,266      2,455        2,470      3,946      14,532

Operating leases (4)

     28,643      55,590      52,368      51,367        51,435      241,736      481,139

Other contractual commitments (4)

     101,072      26,452      4,421      771        —        —        132,716
                                                 
   $ 196,302    $ 210,964    $ 178,401    $ 503,200      $ 140,017    $ 1,418,634    $ 2,647,518
                                                 

 

(1) Represents principal only.
(2) Represents interest on convertible debt, Chicago IBX financing, Asia-Pacific financing, European financing and Netherlands financing based on their approximate interest rates as of June 30, 2009.
(3) Represents principal and interest.
(4) Represents off-balance sheet arrangements. Other contractual commitments are described below.
(5) The loan payable under the Chicago IBX financing has a 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. We intend to extend the maturity of the loan payable under the Chicago IBX financing.

In connection with six of our IBX leases, we entered into six irrevocable letters of credit totaling $11.4 million with Bank of America. These letters of credit were provided in lieu of cash deposits under the $25.0 million Bank of America revolving credit line and automatically renews in successive one-year periods until the final lease expiration date. If the landlord for this IBX lease decides to drawdown on this letter of credit, we will be required to fund this letter of credit either through cash collateral or borrowing under the $25.0 million Bank of America revolving credit line. This contingent commitment is not reflected in the table above.

Primarily as a result of our various IBX expansion projects, as of June 30, 2009, we were contractually committed for $62.2 million of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided, in connection with the work necessary to complete construction and open these IBX centers prior to making them available to customers for installation. This amount, which is expected to be paid during the remainder of 2009 and 2010, is reflected in the table above as “other contractual commitments.”

We have other non-capital purchase commitments in place as of June 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, which contractually bind us for goods or services to be delivered or provided during the remainder of 2009 and beyond. Such other purchase commitments as of June 30, 2009, which total $70.5 million, are also reflected in the table above as “other contractual commitments.”

 

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In addition, although we are not contractually obligated to do so, we expect to incur additional capital expenditures of approximately $200.0 million to $250.0 million, in addition to the $62.2 million in contractual commitments discussed above as of June 30, 2009, in our various IBX expansion projects during the remainder of 2009 and 2010 in order to complete the work needed to open these IBX centers. These non-contractual capital expenditures are not reflected in the table above. If the current economic environment persists, we could delay these non-contractual capital expenditure commitments to preserve liquidity.

Critical Accounting Estimates

Equinix’s financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are affected by management’s application of accounting policies. On an on-going basis, management evaluates its estimates and judgments. Critical accounting policies for Equinix that affect our more significant judgment and estimates used in the preparation of our condensed consolidated financial statements include accounting for income taxes, accounting for impairment of goodwill and accounting for property, plant and equipment, which are discussed in more detail under the caption “Critical Accounting Estimates” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2008.

Recent Accounting Pronouncements

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

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

As more fully described in Cash, Cash Equivalents and Short-Term and Long-Term Investments in Note 7 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, during the six months ended June 30, 2009, we incurred an additional $2.7 million of other-than-temporary impairment loss from our investment portfolio (consisting of a single money market account) in the Reserve Primary Fund. We issued additional convertible debt in June 2009, the fair value of which is subject to interest rate risk. The fair value of our convertible debt is disclosed in Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. There have been no other significant changes in our market risk, investment portfolio risk, interest rate risk, foreign currency risk and commodity price risk exposures and procedures during the six months ended June 30, 2009 as compared to the respective risk exposures and procedures disclosed in Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Item 4. Controls and Procedures

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

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

 

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

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against us, certain of our officers and directors (the “Individual Defendants”), and several investment banks that were underwriters of our 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 us 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 our 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 our 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 us, but denied the motion to dismiss the Section 11 claim.

At the court’s request, Plaintiffs selected six “focus” cases, which do not include us. The court indicated that its decisions in the six focus cases are intended to provide strong guidance for the parties in the remaining cases. On August 14, 2007, the plaintiffs filed amended complaints in the six focus cases. On September 27, 2007, the plaintiffs moved to certify a class in these six cases. On November 14, 2007, the defendants in the six focus cases filed motions to dismiss the amended complaints. On March 26, 2008, the court dismissed the Securities Act claims of those members of the putative classes in the focus cases who sold their securities for a price in excess of the initial offering price and those who purchased outside the previously certified class period. With respect to all other claims, the motions to dismiss were denied. On October 10, 2008, at the request of plaintiffs, plaintiffs’ motion for class certification was withdrawn, without prejudice. On April 3, 2009, the plaintiffs submitted to the court a motion for preliminary approval of a settlement of the approximately 300 coordinated cases, which includes Equinix, the underwriter defendants in the Equinix class action lawsuit, and the plaintiff class in the Equinix class action lawsuit. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On June 11, 2009, the court issued an order preliminarily approving the proposed stipulation and agreement of settlement among the parties and certifying settlement classes. The settlement is subject to termination by the parties under certain circumstances and final approval by the court. There is no assurance that the court will grant final approval.

 

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Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter. We are 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. We intend to continue to defend the action vigorously if the settlement is not approved.

On August 22, 2008, a complaint was filed against Equinix, 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 Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the internet exchange services business of Equinix. 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 Equinix 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 $725.0 million value of Equinix 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 Equinix and other Defendants. The court has not yet ruled on any of the motions to dismiss. We believe that plaintiffs’ claims and alleged damages are without merit and we intend to defend the litigation vigorously.

Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter. We are 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.

 

Item 1A. Risk Factors

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

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

We have a significant amount of debt. As of June 30, 2009, our total indebtedness was approximately $1.5 billion, our stockholders’ equity was $1.1 billion and our cash and investments totaled $603.4 million.

Our substantial amount of debt could have important consequences. For example, it could:

 

   

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

 

   

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

 

   

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

 

   

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

 

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

 

   

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

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

In addition, of our total indebtedness as of June 30, 2009, $569.2 million was non-convertible senior debt (of which $245.5 million was with a single lender). These are committed facilities, virtually all of which are fully drawn or advanced, for which we are amortizing debt repayments of either principal and/or interest only, and we were in compliance with the covenants related to this debt effective June 30, 2009. However, deteriorating market and liquidity conditions may give rise to issues which may impact the lenders’ ability to hold these debt commitments to maturity. Accordingly, these lenders of committed and drawn facilities may refuse to fund advances under the undrawn facilities or attempt to call outstanding amounts, even though no call provisions exist absent a default. Loss of these facilities would have an adverse effect on our liquidity.

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

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

Our capital expenditures, together with ongoing operating expenses and obligations to service our debt, will be a substantial drain on our cash flow and may decrease our cash balances. The capital markets are currently limited for external financing opportunities. Additional debt or equity financing, especially in the current credit-constrained climate, may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to obtain needed debt and/or equity financing or to generate sufficient cash from operations may require us to prioritize projects or curtail capital expenditures which could adversely affect our results of operations.

The global financial crisis may have an impact on our business and financial condition in ways that we currently cannot predict.

The continued credit crisis and related turmoil in the global financial markets has had and may continue to have an impact on our business and our financial condition. For example, we are currently unable to access cash invested with the Reserve Primary Fund, a prime obligations money market fund that has suspended redemptions and is being liquidated. While we received periodic distributions from the Reserve during the fourth quarter of 2008 and the first quarter of 2009, the Reserve continues to hold a portion of our investment balance. We had invested approximately $50.9 million in this fund, wrote-off $4.2 million and had received redemptions of approximately $45.8 million as of June 30, 2009. The remaining balance still held at the Reserve had a fair value of $897,000 as of June 30, 2009. While we expect to receive substantially all of our remaining holdings in this fund within the next six months, we cannot predict when this will occur or the amount we will receive. Further, 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 us. We do not believe that the current liquidity issues related to this fund will impact our ongoing business operations. However, if the current market conditions continue to deteriorate, we may suffer further losses on our investment portfolio, which could have a material adverse effect on our liquidity.

 

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The global financial crisis could have a material adverse effect on our liquidity in other ways. Customer collections are our primary source of cash. While we believe we have a strong customer base and have experienced strong collections in the past, if the current market conditions continue to deteriorate, some of our customers may begin to have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us. For example, we have a number of large customers in the financial services sector which has been significantly impacted by the downturn. We may also be required to increase our allowance for doubtful accounts and our results would be negatively impacted. Our sales cycle could also be lengthened as customers slow spending, or delay decision-making, on our products and services, which could adversely affect our revenue growth. Finally, we could also experience pricing pressure as a result of economic conditions if our competitors lower prices and attempt to lure away our customers with lower cost solutions.

The credit crisis could also have an impact on our foreign exchange forward contract and interest rate swap hedging contracts if our counterparties are forced to file for bankruptcy or are otherwise unable to perform their obligations.

Finally, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.

We are exposed to fluctuations in the market values of our portfolio investments and in interest rates; impairment of our investments could harm our results of operations.

We maintain an investment portfolio of various holdings, types and maturities, including money market funds and other short-term and long-term securities. These securities are classified as available-for-sale and, consequently, are recorded on our consolidated balance sheets at fair value with unrealized gains or losses as a separate component of accumulated other comprehensive income or loss. Our portfolio includes fixed income securities, the values of which are subject to market price volatility and changes in interest rates. If the market price declines, we may recognize in our statements of operations the decline in fair value of our investments below the cost basis when the decline is judged to be other-than-temporary. For information regarding the sensitivity of and risks associated with the market value of our portfolio and interest rates, refer to our discussion of our investment portfolio and interest rate risks in “Quantitative and Qualitative Disclosures About Market Risk” included in Part I, Item 3 of this Quarterly Report on Form 10-Q.

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

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

Although we have in the past, and may decide in the future, to undertake foreign exchange hedging transactions to reduce foreign currency transaction exposure, we do not currently intend to eliminate all foreign currency transaction exposure. For example, while we hedge certain of our foreign currency assets and liabilities on our balance sheet, we do not hedge revenue. During fiscal 2007 and the first half of 2008, the U.S. dollar had been generally weaker relative to certain of the currencies of the foreign countries in which we operate. This overall weakness of the U.S. dollar had a positive impact on our consolidated results of operations because the foreign denominations translated into more U.S. dollars. However, during the second half of 2008 and through the first quarter of 2009, the U.S. dollar strengthened relative to certain of the currencies of the foreign countries in which we operate. This significantly impacted our consolidated financial position and results of operations as amounts in foreign currencies are generally translating into less U.S. dollars. During the three months ended June 30, 2009, the U.S. dollar weakened relative to

 

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certain of the currencies of the foreign countries in which we operate, which had a positive impact to our results of operations. Going forward, strengthening of the U.S. dollar would have a significant impact on our consolidated financial position and results of operations including the amount of revenue that we report in future periods. For additional information on foreign currency risk, refer to our discussion of foreign currency risk in “Quantitative and Qualitative Disclosures About Market Risk” included in Part I, Item 3 of this Quarterly Report.

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

A customer’s decision to license cabinet space in one of our IBX centers and to purchase additional services typically involves a significant commitment of resources. In addition, some customers will be reluctant to commit to locating in our IBX centers until they are confident that the IBX center has adequate carrier connections. As a result, we have a long sales cycle. Furthermore, we may expend significant time and resources in pursuing a particular sale or customer that does not result in revenue.

The current economic downturn may further impact this long sales cycle by making it extremely difficult for customers to accurately forecast and plan future business activities. This could cause customers to slow spending, or delay decision-making, on our products and services, which would delay and lengthen our sales cycle.

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

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

As of June 30, 2009 our accumulated deficit was $422.5 million. Although we generated net income during 2008, our first full year of net income since our inception, and during the first and second quarters of 2009, we are also currently investing heavily in our future growth through the build-out of several additional IBX centers and IBX center expansions. As a result, we will incur higher depreciation and other operating expenses, as well as interest expense, that may negatively impact our ability to sustain profitability in future periods unless and until these new IBX centers generate enough revenue to exceed their operating costs and cover our additional overhead needed to scale our business for this anticipated growth. The current global financial crisis may also impact our ability to sustain profitability if we cannot generate sufficient revenue to offset the increased costs of our recently-opened IBX centers or IBX centers currently under construction. In addition, costs associated with the acquisition and integration of any acquired companies, as well as the additional interest expense associated with debt financing we have undertaken to fund our growth initiatives, may also negatively impact our ability to sustain profitability. Finally, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis.

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

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

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

Over the last several years, we have completed several acquisitions (including our acquisitions of IXEurope plc in 2007 and Virtu Secure Webservices B.V. in 2008) and we may make additional acquisitions in the future. These acquisitions may include acquisitions of businesses, products, services or technologies that we believe to be complementary, as well as acquisitions of new IBX centers or real estate for development of new IBX centers. We may pay for future acquisitions by using our existing cash resources (which may limit other potential uses of our cash), incurring additional debt (which may increase our interest expense, leverage and debt service requirements) and/or issuing shares (which may dilute our existing stockholders and have a negative effect on our earnings per share). Acquisitions expose us to several potential risks, including:

 

   

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

 

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our potential inability to successfully pursue or realize some or all of the anticipated revenue opportunities associated with an acquisition, some of which would be anticipated in any purchase price;

 

   

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

 

   

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

 

   

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

 

   

the possibility that additional capital expenditures may be required;

 

   

the possible loss or reduction in value of acquired businesses;

   

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

 

   

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

 

   

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

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

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

Our construction of additional new IBX centers could involve significant risks to our business.

In order to sustain our growth in certain of our existing and new markets, we must acquire suitable land with or without structures to build new IBX centers from the ground up. We call these “greenfield builds.” Greenfield builds are currently underway, or being contemplated, in several key markets. A greenfield build involves substantial planning and lead-time, much longer time to completion than an IBX retrofit of an existing data center, and significantly higher costs of construction, equipment and materials, which could have a negative impact on our returns. A greenfield build also requires us to carefully select and rely on the experience of one or more general contractors and associated subcontractors during the construction process. Should a general contractor or significant subcontractor experience financial or other problems during the construction process, we could experience significant delays, increased costs to complete the project and other negative impacts to our expected returns. Site selection is also a critical factor in our expansion plans, and there may not be suitable properties available in our markets with the necessary combination of high power capacity and fiber connectivity.

While we may prefer to locate new IBX centers adjacent to our existing locations, we may be limited by the inventory and location of suitable properties, as well as by the need for adequate power and fiber to the site. In the event we decide to build new IBX centers separate from our existing IBX centers, we may provide services to interconnect these two centers. Should these services not provide the necessary reliability to sustain service, this could result in lower interconnection revenue and lower margins and could have a negative impact on customer retention over time.

 

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

Our business depends on providing customers with highly reliable service. We must protect our customers’ IBX infrastructure and their equipment located in our IBX centers. Furthermore, we continue to acquire IBX centers not built by us. If we discover that these IBX centers and their infrastructure assets are not in the condition we expected when they were acquired, we may be required to incur substantial additional costs to repair or upgrade the centers. The services we provide in each of our IBX centers are subject to failure resulting from numerous factors, including:

 

   

human error;

 

   

equipment failure;

 

   

physical, electronic and cybersecurity breaches;

 

   

fire, earthquake, flood, tornados and other natural disasters;

 

   

extreme temperatures;

 

   

water damage;

 

   

fiber cuts;

 

   

power loss;

 

   

terrorist acts;

 

   

sabotage and vandalism; and

 

   

failure of business partners who provide our resale products.

Problems at one or more of our IBX centers, whether or not within our control, could result in service interruptions or significant equipment damage. We have service level commitment obligations to certain of our customers, including our significant customers. As a result, service interruptions or significant equipment damage in our IBX centers could result in difficulty maintaining service level commitments to these customers and potential claims related to such failures. Because our IBX centers are critical to many of our customers’ businesses, service interruptions or significant equipment damage in our IBX centers could also result in lost profits or other indirect or consequential damages to our customers. We cannot guarantee that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against us as the result of a problem at one of our IBX centers.

We may incur significant liability to our customers in connection with a loss of power or our failure to meet other service level commitment obligations, or if we are held liable for a substantial damage award. In addition, any loss of service, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results.

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

Environmental regulations may impose upon us new or unexpected costs.

We are subject to various federal, state, local and foreign environmental and health and safety laws and regulations, including those relating to the generation, storage, handling and disposal of hazardous substances and wastes. Certain of these laws and regulations also impose joint and several liability, without regard to fault, for investigation and cleanup costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment.

 

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Our operations involve the use of hazardous substances and materials such as petroleum fuel for emergency generators, as well as batteries, cleaning solutions and other materials. In addition, we lease, own or operate real property at which hazardous substances and regulated materials have been used in the past. At some of our locations, hazardous substances or regulated materials are known to be present in soil or groundwater and there may be additional unknown hazardous substances or regulated materials present at sites we own, operate or lease. At some of our locations, there are land use restrictions in place relating to earlier environmental cleanups that do not materially limit our use of the sites. To the extent any hazardous substances or any other substance or material must be cleaned up or removed from our property, we may be responsible under applicable laws, regulations or leases for the removal or cleanup of such substances or materials, the cost of which could be substantial.

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

Fossil fuel combustion creates greenhouse gas emissions that are linked to global climate change. Regulations to limit greenhouse gas emissions are in force in the European Union in an effort to prevent or reduce climate change. In the United States, federal legislative proposals are being actively considered that would, if adopted, implement some form of regulation or taxation to reduce or mitigate greenhouse gas emissions. In addition, it is possible that the U.S. Environmental Protection Agency (“EPA”) will use its existing authority under the Clean Air Act to regulate greenhouse gas emissions.

Several states within the United States have adopted laws intended to limit fossil fuel consumption and/or encourage renewable energy development for the same purpose. For example, California enacted AB-32, the Global Warming Solutions Act of 2006 (“GWSA”), prescribing a statewide cap on global warming pollution with a goal of reaching 1990 greenhouse gas emission levels by 2020 and 80% below 1990 levels by 2050 and establishing a mandatory emissions reporting program.

Federal, regional and state regulatory programs are still developing. In their final form, they may include a tax on carbon, a carbon “cap-and-trade” market, and/or other restrictions on carbon and greenhouse gas emissions. The area of greenhouse gas limitations and regulation is rapidly changing and will continue to change as additional legislation is considered and adopted, and regulations are finalized that implement existing law.

We do not anticipate that climate change-related laws and regulations would directly limit the emissions of greenhouse gases by our operations. We could, however, be directly subject to taxes, fees or costs, or could indirectly be required to reimburse electricity providers for such costs that would represent the amount of greenhouse gases we emit. The expected controls on greenhouse gas emissions are likely to increase the costs of electricity or fossil fuels, and these cost increases could materially increase our costs of operation or limit the availability of electricity or emergency generator fuels. To the extent any environmental laws enacted or regulations passed by the United States, or any domestic or foreign jurisdiction we perform business in, impose new or unexpected costs, our business, results of operations or financial condition may be adversely affected.

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

Since January 1, 2008, the closing sale price of our common stock on the NASDAQ Global Select Market has ranged from $35.14 to $100.75 per share. The market price of the shares of our common stock has been and may continue to be highly volatile. General economic and market conditions, and market conditions for telecommunications stocks in general, may affect the market price of our common stock.

 

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

 

   

our operating results or forecasts;

 

   

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

 

   

developments in our relationships with corporate customers;

 

   

announcements by our customers or competitors;

 

   

changes in regulatory policy or interpretation;

 

   

governmental investigations;

 

   

changes in the ratings of our stock by securities analysts;

 

   

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

 

   

acquisitions by us of complementary businesses; or

 

   

the operational performance of our IBX centers.

The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging telecommunications companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock.

We expect our operating results to fluctuate.

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

 

   

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

 

   

the timing and magnitude of capital expenditures, financing or other expenses related to the acquisition, purchase or construction of additional IBX centers or the upgrade of existing IBX centers;

 

   

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

 

   

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

 

   

costs associated with the write-off or exit of unimproved or underutilized property, or the reversal of prior exit costs due to a change in strategy;

 

   

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

 

   

the duration of the sales cycle for our services;

 

   

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

 

   

acquisitions or dispositions we may make;

 

   

the financial condition and credit risk of our customers;

 

   

the provision of customer discounts and credits;

 

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

 

   

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

 

   

competition in the markets in which we operate;

 

   

conditions related to international operations;

 

   

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

 

   

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

 

   

changes in rent expense as we amend our IBX center leases in connection with extending their lease terms when their initial lease term expiration dates approach;

 

   

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

 

   

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

 

   

changes in employee stock-based compensation;

 

   

changes in income tax benefit or expense; and

 

   

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

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

We are exposed to potential risks from legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

Although we received an unqualified opinion regarding the effectiveness of our internal controls over financial reporting as of December 31, 2008, in the course of our ongoing evaluation of our internal controls over financial reporting we have identified certain areas which we would like to improve and are in the process of evaluating and designing enhanced processes and controls to address these areas identified during our evaluation, none of which we believe constitutes a material change. However, we cannot be certain that our efforts will be effective or sufficient for us, or our independent registered public accounting firm, to issue unqualified reports in the future, especially as our business continues to grow and evolve.

Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timely manner and may discover deficiencies in existing systems and controls. Any such deficiencies could result in material misstatements in our consolidated financial statements.

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

For the years ended December 31, 2008, 2007 and 2006, we recognized 37%, 23% and 14%, respectively, of our revenues outside the U.S. For the six months ended June 30, 2009, we recognized 38% of our revenues outside the U.S.

 

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

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

 

   

the costs of customizing IBX centers for foreign countries;

 

   

protectionist laws and business practices favoring local competition;

 

   

greater difficulty or delay in accounts receivable collection;

 

   

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

 

   

political and economic instability;

 

   

fluctuations in currency exchange rates;

 

   

difficulties in repatriating funds from certain countries;

 

   

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

 

   

compliance with the Foreign Corrupt Practices Act; and

 

   

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

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

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

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

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

Power outages, such as those that occurred in California during 2001, the Northeast in 2003, and from the tornados on the U.S. east coast in 2004, could harm our customers and our business. We attempt to limit exposure to system downtime by using backup generators and power supplies; however, we may not be able to limit our exposure entirely even with these protections in place, as was the case with the power outages we experienced in our Chicago and Washington, D.C. metro area IBX centers in 2005 and London metro area IBX centers in 2007.

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

 

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

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

We may be forced to take steps, and may be prevented from pursuing certain business opportunities, to ensure compliance with certain tax-related covenants agreed to by us.

We agreed to a covenant in connection with our combination with i-STT Pte Ltd and Pihana Pacific, Inc. in 2002 (which we refer to as the FIRPTA covenant) that we would use all commercially reasonable efforts to ensure that, at all times from and after the closing of the combination, none of our capital stock issued to STT Communications would constitute “United States real property interests” within the meaning of Section 897(c) of the Code. Under Section 897(c) of the Code, our capital stock issued to STT Communications would generally constitute “United States real property interests” at such point in time that the fair market value of the “United States real property interests” owned by us equals or exceeds 50% of the sum of the aggregate fair market values of (a) our “United States real property interests,” (b) our interests in real property located outside the United States and (c) any other assets held by us which are used or held for use in our trade or business. Currently, the fair market value of our “United States real property interests” is significantly below the 50% threshold. However, in order to ensure compliance with the FIRPTA covenant, we may be limited with respect to the business opportunities we may pursue, particularly if the business opportunities would increase the amounts of “United States real property interests” owned by us or decrease the amount of other assets owned by us. In addition, we may take proactive steps to avoid our capital stock being deemed a “United States real property interest,” including, but not limited to, (a) a sale-leaseback transaction with respect to some or all of our real property interests, or (b) the formation of a holding company organized under the laws of the Republic of Singapore which would issue shares of its capital stock in exchange for all of our outstanding stock (which would require the submission of that transaction to our stockholders for their approval and the consummation of that exchange). We will take these actions only if such actions are commercially reasonable for our stockholders and us. We have entered into an agreement with STT Communications and its affiliate pursuant to which we will no longer be bound by the FIRPTA covenant as of September 30, 2009. If we were to breach this covenant, we may be liable for damages to STT Communications.

Increases in property taxes could adversely affect our business, financial condition and results of operations.

Our IBX centers are subject to state and local real property taxes in the U.S. and certain of our foreign jurisdictions. The state and local real property taxes on our IBX centers may increase as property tax rates change and as the value of the properties are assessed or reassessed by taxing authorities. Many state and local governments are facing budget deficits, which may cause them to increase assessments or taxes. If property taxes increase, our business, financial condition and operating results could be adversely affected.

A small number of our stockholders has voting control over a substantial portion of our stock and has influence over matters requiring stockholder consent.

Certain of our stockholders each hold voting control over greater than 10% of our outstanding common stock. In addition, these stockholders are not prohibited from buying shares of our stock in public or private transactions. As a result, each of these stockholders is able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could prevent or delay a third party from acquiring or merging with us.

 

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

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

 

   

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

 

   

the prohibition of cumulative voting in the election of directors;

 

   

a super-majority voting requirement to effect business combinations or certain amendments to our certificate of incorporation and bylaws;

 

   

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

 

   

the prohibition of stockholder action by written consent; and

 

   

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

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

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

The presence of diverse telecommunications carriers’ fiber networks in our IBX centers is critical to our ability to retain and attract new customers. We are not a telecommunications carrier, and as such we rely on third parties to provide our customers with carrier services. We believe that the availability of carrier capacity will directly affect our ability to achieve our projected results. We rely primarily on revenue opportunities from the telecommunications carriers’ customers to encourage them to invest the capital and operating resources required to connect from their centers to our IBX centers. Carriers will likely evaluate the revenue opportunity of an IBX center based on the assumption that the environment will be highly competitive. We cannot provide assurance that each and every carrier will elect to offer its services within our IBX centers or that once a carrier has decided to provide Internet connectivity to our IBX centers that it will continue to do so for any period of time. Further, many carriers are experiencing business difficulties or announcing consolidations. As a result, some carriers may be forced to downsize or terminate connectivity within our IBX centers, which could have an adverse effect on our operating results.

Our new IBX centers require construction and operation of a sophisticated redundant fiber network. The construction required to connect multiple carrier facilities to our IBX centers is complex and involves factors outside of our control, including regulatory processes and the availability of construction resources. If the establishment of highly diverse Internet connectivity to our IBX centers does not occur, is materially delayed or is discontinued, or is subject to failure, our operating results and cash flow will be adversely affected. Any hardware or fiber failures on this network may result in significant loss of connectivity to our new IBX center expansions. This could affect our ability to attract new customers to these IBX centers or retain existing customers.

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

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

 

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A small number of customers account for a significant portion of our revenues, and the loss of any of these customers could significantly harm our business, financial condition and results of operations.

While no single customer accounted for 10% or more of our revenues for the six months ended June 30, 2009 and 2008, our top 10 customers accounted for approximately 20% of our revenues during these periods. We expect that a small percentage of our customers will continue to account for a significant portion of our revenues for the foreseeable future. We cannot guarantee that we will retain these customers or that they will maintain their commitments in our IBX centers at current levels. If we lose any of these key customers, or if any of them decide to reduce the level of their commitment to us, our business, financial condition and results of operations could be adversely affected.

We resell products and services of third parties that may require us to pay for such products and services even if our customers fail to pay us for them, which may have a negative impact on our operating results.

In order to provide resale services such as bandwidth, managed services and other network management services, we contract with third-party service providers. These services require us to enter into fixed term contracts for services with third-party suppliers of products and services. If we experience the loss of a customer who has purchased a resale product, we may remain obligated to continue to pay our suppliers for the term of the underlying contracts. The payment of these obligations without a corresponding payment from customers will reduce our financial resources and may have a material adverse effect on our operating and financial results and cash flows.

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

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

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

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

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

Our IBX centers and other products and services must be able to differentiate themselves from those of other providers of space and services for telecommunications companies, webhosting companies and other colocation providers. In addition to competing with neutral colocation providers, we must compete with traditional colocation providers, including telecom companies, carriers, Internet service providers and webhosting facilities. Similarly, with respect to our other products and services, including managed services, bandwidth services and security services, we must compete with more established providers of similar services. Most of these companies have longer operating histories and significantly greater financial, technical, marketing and other resources than us.

Because of their greater financial resources, some of our competitors have the ability to adopt aggressive pricing policies, especially if they have been able to restructure their debt or other obligations. As a result, in the future, we may suffer from pricing pressure that would adversely affect our ability to generate revenues and adversely affect our operating results. In addition, these competitors could offer colocation on neutral terms, and may start doing so in the same metropolitan areas in which we have IBX centers. Some of these competitors may also provide our target customers with additional benefits, including bundled communication services, and may do so in a manner that is more attractive to our potential customers than obtaining space in our IBX centers. If these competitors were able to adopt aggressive pricing policies together with offering colocation space, our ability to generate revenues may be materially and adversely affected.

We may also face competition from persons seeking to replicate our IBX center concept by building new IBX centers or converting existing IBX centers that some of our competitors are in the process of divesting. We may continue to see increased competition for data center space and customers from large REITS who also operate in our market. We may experience competition from our landlords, some of which are REITS, in this regard. Rather than leasing available space in our buildings to large single tenants, they may decide to convert the space instead to smaller square foot units designed for multi-tenant colocation use.

 

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Landlords/REITS may enjoy a cost effective advantage in providing services similar to those provided by our IBX centers, and in addition to the risk of losing customers to these parties, this could also reduce the amount of space available to us for expansion in the future. Competitors may operate more successfully or form alliances to acquire significant market share. Furthermore, enterprises that have already invested substantial resources in outsourcing arrangements may be reluctant or slow to replace, limit or compete with their existing systems by becoming a customer. Customers may also decide it is cost-effective for them to build out their own data centers, which could have a negative impact on our results of operations. In addition, other companies may be able to attract the same potential customers that we are targeting. Once customers are located in competitors’ facilities, it may be extremely difficult to convince them to relocate to our IBX centers.

Because we depend on the retention of key employees, failure to maintain competitive compensation packages, including equity incentives, may be disruptive to our business.

Our success in retaining key employees and discouraging them from moving to a competitor is an important factor in our ability to remain competitive. As is common in our industry, our employees are typically compensated through grants of equity awards in addition to their regular salaries. In addition to granting equity awards to selected new hires, we periodically grant new equity awards to certain employees as an incentive to remain with us. To the extent we are unable to offer competitive compensation packages to our employees and adequately maintain equity incentives due to equity expensing or otherwise, and should employees decide to leave us, this may be disruptive to our business and may adversely affect our business, financial condition and results of operations.

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

Our ability to maximize revenues depends on our ability to develop and grow a balanced customer base, consisting of a variety of companies, including global enterprises, content providers, financial companies, and network service providers. The more balanced the customer base within each IBX center, the better we will be able to generate significant interconnection revenues, which in turn increases our overall revenues. Our ability to attract customers to our IBX centers will depend on a variety of factors, including the presence of multiple carriers, the mix of products and services offered by us, the overall mix of customers, the IBX center’s operating reliability and security and our ability to effectively market our services. However, some of our customers are, and are likely to continue to be, Internet companies that face many competitive pressures and that may not ultimately be successful. If these customers do not succeed, they will not continue to use the IBX centers which may be disruptive to our business. Finally, the current economic downturn may harm our ability to attract and retain customers if customers slow spending, or delay decision-making, on our products and services or if customers begin to have difficulty paying us and we experience increased churn in our customer base. Any of these factors may hinder the development and growth of a balanced customer base and adversely affect our business, financial condition and results of operations.

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

While we own certain of our IBX centers, others are leased under long-term arrangements with lease terms expiring at various dates ranging from 2009 to 2029. These leased centers have all been subject to significant development by us in order to convert them from, in most cases, vacant buildings or warehouses into IBX centers. All of our IBX center leases have renewal options available to us. However, these renewal options provide for rent set at then-prevailing market rates. To the extent that then-prevailing market rates are higher than present rates, these higher costs may adversely impact our business and results of operations.

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

During the quarter ended September 30, 2001, putative shareholder class action lawsuits were filed against us, a number of our officers and directors, and several investment banks that were underwriters of our initial public offering. Similar complaints were filed against more than 300 other issuers, their officers and directors, and investment banks. The suits allege that the underwriter defendants agreed to allocate stock in our 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. Plaintiffs allege that the prospectus for our initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. A previously agreed upon settlement with the plaintiffs has been terminated. On August 14, 2007, the plaintiffs filed amended complaints in six cases selected as test, or “focus,” cases and moved for class certification on September 27, 2007.

 

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On October 10, 2008, at the request of plaintiffs, plaintiffs’ motion for class certification was withdrawn, without prejudice. On April 3, 2009, the plaintiffs submitted to the court a motion for preliminary approval of a settlement of the approximately 300 coordinated cases, which includes Equinix, the underwriter defendants in the Equinix class action