[July 29, 2011] MANAGEMENT'S DISCUSSION AND ANALYSIS Tweet (Edgar Glimpses Via Acquire Media NewsEdge) 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 • Non-GAAP Financial Measures • Liquidity and Capital Resources • Contractual Obligations and Off-Balance-Sheet Arrangements • Critical Accounting Policies and Estimates • Recent Accounting Pronouncements On April 25, 2011, as more fully described in Note 2 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, Zion RJ Participações S.A., referred to as Zion, a Brazilian joint-stock company controlled by our wholly-owned subsidiary and co-owned by RW Brasil Fundo de Investimento em Participações, a subsidiary of Riverwood Capital L.P., referred to as Riverwood, completed the acquisition of approximately 90% of the outstanding capital stock of ALOG Data Centers do Brasil S.A. and its subsidiaries, referred to as ALOG, which resulted in Equinix acquiring an indirect, controlling interest in ALOG of approximately 53%. This transaction is referred to as the ALOG acquisition. In July 2011, we issued $750.0 million aggregate principal amount of 7.00% senior notes due July 15, 2021, which is referred to as the 7.00% senior notes offering. We intend to use the net proceeds from the 7.00% senior notes offering for general corporate purposes, including the funding of our expansion activities, and the repayment of our 2.50% convertible subordinated notes due April 15, 2012. Overview Equinix provides global data center services that protect and connect the world's most valued information assets. Global enterprises, financial services companies, and content and network service providers rely upon Equinix's leading insight and data centers in 37 markets around the world for the safeguarding of their critical IT equipment and the ability to directly connect to the networks that enable today's information-driven economy. Equinix offers the following data center services: premium data center colocation, interconnection and exchange services, and outsourced IT infrastructure services. As of June 30, 2011, we operated or had partner IBX data centers in the Atlanta, Boston, Buffalo, Chicago, Cleveland, Dallas, Denver, Detroit, Indianapolis, Los Angeles, Miami, Nashville, New York, Philadelphia, Phoenix, Pittsburgh, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, St. Louis, Tampa, Toronto, Washington, D.C. metro areas in the Americas region; France, Germany, the Netherlands, Switzerland and the United Kingdom in the Europe, Middle East, Africa (EMEA) region; and Australia, Hong Kong, Japan, China and Singapore in the Asia-Pacific region. 29 -------------------------------------------------------------------------------- Table of Contents We leverage our global data centers in 37 markets around the world as a global service delivery platform which serves more than 90% of the world's Internet routes and allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global delivery platform and the quality of our IBX data centers, we believe we have established a critical mass of customers. As more customers locate in our IBX data centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our services. These partners, in turn, pull in their business partners, creating a "marketplace" for their services. Our global delivery platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange thus lowering overall cost and increasing flexibility. Our focused business model is based on our critical mass of customers and the resulting "marketplace" effect. This global delivery platform, combined with our strong financial position, continues to drive new customer growth and bookings as we drive scale into our global business. Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services with their colocation offerings. The data center services market landscape has evolved to include cloud computing/utility providers, application hosting providers and systems integrators, managed infrastructure hosting providers and colocation providers with over 350 companies providing data center services in the United States alone. Each of these data center services providers can bundle various colocation, interconnection and network services, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 12 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of services. Excluding the ALOG acquisition, our customer count increased to 4,135 as of June 30, 2011 versus 3,661 as of June 30, 2010, an increase of 13%. This increase was due to organic growth in our business. Our utilization rate represents the percentage of our cabinet space billing versus net sellable cabinet space available taking into account power limitations. Excluding the impact of the ALOG acquisition, our utilization rate increased to 76% as of June 30, 2011 versus approximately 74% as of June 30, 2010; however, excluding the impact of our IBX data center expansion projects that have been open for less than four full quarters, our utilization rate would have increased to approximately 86% as of June 30, 2011. Our utilization rate varies from market to market among our IBX data centers across the Americas, EMEA and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows. Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and 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. 30 -------------------------------------------------------------------------------- Table of Contents 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 have comprised more than 90% of our total revenues during the past three years. In addition, during the past three years, in any given quarter, greater than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth. Our non-recurring revenues are primarily comprised of installation services related to a 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. Additionally, revenue from contract settlements, when a customer wishes to terminate their contract early, is generally recognized on a cash basis, when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future. Our Americas revenues are derived primarily from colocation and interconnection services while our EMEA and Asia-Pacific revenues are derived primarily from colocation and managed infrastructure services. The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX data centers, utility costs, including electricity and bandwidth, IBX data center employees' salaries and benefits, including stock-based compensation, repairs and maintenance, supplies and equipment and security services. A substantial majority of our cost of revenues is fixed in nature and should not vary significantly from period to period, unless we expand our existing IBX data centers or open or acquire new IBX data centers. However, there are certain costs which are considered more variable in nature, including utilities and supplies, that are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, will increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by the customer. In addition, the cost of electricity is generally higher in the summer months as compared to other times of the year. To the extent we incur increased utility costs, such increased costs could materially impact our financial condition, results of operations and cash flows. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change, such increased costs could materially impact our financial condition, results of operations and cash flows. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including stock-based compensation, sales commissions, marketing programs, public relations, promotional materials and travel, as well as bad debt expense and amortization of customer contract intangible assets. General and administrative expenses consist primarily of salaries and related expenses, including stock-based compensation, accounting, legal and other professional service fees, and other general corporate expenses such as our corporate regional headquarters office leases and some depreciation expense. 31 -------------------------------------------------------------------------------- Table of Contents 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 or is acquired and before it starts generating any meaningful revenue. Furthermore, in relation to cost of revenues, we note that the Americas region has a lower cost of revenues as a percentage of revenue than either EMEA or Asia-Pacific. This is due to both the increased scale and maturity of the Americas region compared to either EMEA or Asia-Pacific, as well as a higher cost structure outside of Americas, particularly in EMEA. While we expect all three regions to continue to see lower cost of revenues as a percentage of revenues in future periods, we expect the trend of Americas having the lowest cost of revenues as a percentage of revenue and EMEA having the highest to continue. As a result, to the extent that revenue growth outside Americas grows in greater proportion than revenue growth in Americas, our overall cost of revenues as a percentage of revenues may increase in future periods. Sales and marketing expenses and general and administrative expenses may also periodically increase as a percentage of revenue as we continue to scale our operations to support our growth. Constant Currency Presentation Our revenues and certain operating expenses (cost of revenues, sales and marketing and general and administrative expenses) from our international operations have represented and will continue to represent a significant portion of our total revenues and certain operating expenses. As a result, our revenues and certain operating expenses have been and will continue to be affected by changes in the U.S. dollar against major international currencies such as the Brazilian real, British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present period-over-period percentage changes in our revenues and certain operating expenses on a constant currency basis in addition to the historical amounts as reported. Presenting constant currency results of operations is a non-GAAP financial measure and is not meant to be considered in isolation or as an alternative to GAAP results of operations. However, we have presented this non-GAAP financial measure to provide investors with an additional tool to evaluate our operating results. To present this information, our current and comparative prior period revenues and certain operating expenses from entities reporting in currencies other than the U.S. dollar are converted into U.S. dollars at constant exchange rates rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the three months ended June 30, 2010 are used as exchange rates for the three months ended June 30, 2011 when comparing the three months ended June 30, 2011 with the three months ended June 30, 2010 and average rates in effect for the six months ended June 30, 2010 are used as exchange rates for the six months ended June 30, 2011 when comparing the six months ended June 30, 2011 with the six months ended June 30, 2010). Results of Operations Our results of operations for the three months and six months ended June 30, 2011 include the operations of ALOG from April 25, 2011. Our results of operations for the three months and six months ended June 30, 2011 and 2010 include the operations of Switch & Data Facilities Company, Inc., which is referred to as Switch and Data, from May 1, 2010. 32-------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, 2011 and 2010 Revenues. Our revenues were generated from the following revenue classifications and geographic regions (dollars in thousands): Three months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas: Recurring revenues $ 245,199 62 % $ 184,794 63 % 33 % n/a Non-recurring revenues 8,690 2 % 6,852 2 % 27 % n/a 253,889 64 % 191,646 65 % 32 % n/a EMEA: Recurring revenues 81,506 21 % 60,664 20 % 34 % 20 % Non-recurring revenues 7,105 2 % 5,420 2 % 31 % 16 % 88,611 23 % 66,084 22 % 34 % 19 % Asia-Pacific: Recurring revenues 49,823 13 % 36,659 12 % 36 % 21 % Non-recurring revenues 2,577 1 % 1,705 1 % 51 % 40 % 52,400 14 % 38,364 13 % 37 % 22 % Total: Recurring revenues 376,528 95 % 282,118 95 % 33 % 28 % Non-recurring revenues 18,372 5 % 13,976 5 % 31 % 24 % $ 394,900 100 % $ 296,094 100 % 33 % 28 % Americas Revenues. The increase in our Americas revenues was primarily due to (i) $37.3 million of incremental revenues from the impact of the Switch and Data acquisition and the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers including $5.1 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas, Silicon Valley and Washington, D.C. metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, New York and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers' contracts. 33-------------------------------------------------------------------------------- Table of Contents EMEA Revenues. Our revenues from Germany and the U.K., the largest revenue contributors in the EMEA region for the period, each represented approximately 34% of the regional revenues during the three months ended June 30, 2011. During the three months ended June 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA 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 data centers. During the three months ended June 30, 2011, we recorded approximately $2.2 million of revenue from our recently-opened IBX data center expansions in the London and Paris metro areas. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $9.8 million of favorable foreign currency impact to our EMEA revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during the remainder of 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers' contracts. Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 40% and 38%, respectively, of the regional revenues for the three months ended June 30, 2011 and 2010. Our 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 data centers. During the three months ended June 30, 2011, we recorded approximately $1.1 million of revenue generated from our IBX data center expansions in the Singapore, Sydney and Tokyo metro areas. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended June 30, 2010, resulting in approximately $5.6 million of favorable foreign currency impact to our Asia-Pacific revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers' contracts. Cost of Revenues. Our cost of revenues was split among the following geographic regions (dollars in thousands): Three months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas $ 132,468 61 % $ 100,416 61 % 32 % n/a EMEA 53,173 25 % 41,678 26 % 28 % 13 % Asia-Pacific 29,931 14 % 20,488 13 % 46 % 31 % Total $ 215,572 100 % $ 162,582 100 % 33 % 27 % 34 -------------------------------------------------------------------------------- Table of Contents Three months ended June 30, 2011 2010 Cost of revenues as a percentage of revenues: Americas 52 % 52 % EMEA 60 % 63 % Asia-Pacific 57 % 53 % Total 55 % 55 % Americas Cost of Revenues. Our Americas cost of revenues for the three months ended June 30, 2011 and 2010 included $48.3 million and $37.0 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in our Americas cost of revenues included $17.6 million of incremental cost of revenues resulting from the Switch and Data acquisition and the ALOG acquisition. In addition, excluding the impact from the Switch and Data acquisition and the ALOG acquisition, we incurred incremental costs associated with our organic expansion projects and revenue growth, such as $1.4 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth. We expect Americas cost of revenues to increase as we continue to grow our business. EMEA Cost of Revenues. EMEA cost of revenues for the three months ended June 30, 2011 and 2010 included $16.5 million and $12.2 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $2.7 million in utility costs arising from increased customer installations and revenues attributed to customer growth and (ii) $1.6 million of higher compensation expense, including general salaries, bonuses and headcount growth (266 EMEA cost of revenues employees as of June 30, 2011 versus 219 as of June 30, 2010). During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $6.1 million of unfavorable foreign currency impact to our EMEA cost of revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect EMEA 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, 2011 and 2010 included $10.0 million and $6.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily 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 costs to support our revenue growth, such as (i) $2.1 million in higher utility costs and (ii) an increase of $2.1 million of rent and facility costs. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the three months ended June 30, 2010, resulting in approximately $3.1 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business. 35-------------------------------------------------------------------------------- Table of Contents Sales and Marketing Expenses. Our sales and marketing expenses were split among the following geographic regions (dollars in thousands): Three months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas $ 23,683 64 % $ 19,506 67 % 21 % n/a EMEA 8,699 23 % 5,915 21 % 47 % 31 % Asia-Pacific 4,681 13 % 3,492 12 % 34 % 24 % Total $ 37,063 100 % $ 28,913 100 % 27 % 24 % Three months ended June 30, 2011 2010 Sales and marketing expenses as a percentage of revenues: Americas 9 % 10 % EMEA 10 % 9 % Asia-Pacific 9 % 9 % Total 9 % 10 % Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses, inclusive of both acquisitions and organic growth, was primarily due to $2.2 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (264 Americas sales and marketing employees as of June 30, 2011 versus 187 as of June 30, 2010). We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues are expected to continue to increase. In the long-term, we generally expect Americas 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 generally expect them to decrease in the long-term. EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to an increase of $1.9 million in compensation costs, including sales compensation, general salaries, bonuses and headcount growth (99 EMEA sales and marketing employees as of June 30, 2011 versus 67 as of June 30, 2010) and higher professional services from various consulting projects to support our growth. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $900,000 of unfavorable foreign currency impact to our EMEA sales and marketing expenses during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA 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 generally expect them to decrease in the long-term. 36-------------------------------------------------------------------------------- Table of Contents Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (63 Asia-Pacific sales and marketing employees as of June 30, 2011 versus 52 as of June 30, 2010). For the three months ended June 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2010. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific 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 generally expect them to decrease in the long-term. General and Administrative Expenses. Our general and administrative expenses were split among the following geographic regions (dollars in thousands): Three months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas $ 47,007 72 % $ 38,989 72 % 21 % n/a EMEA 12,549 19 % 10,819 20 % 16 % 4 % Asia-Pacific 6,125 9 % 4,358 8 % 41 % 29 % Total $ 65,681 100 % $ 54,166 100 % 21 % 18 % Three months ended June 30, 2011 2010 General and administrative expenses as a percentage of revenues: Americas 19 % 20 % EMEA 14 % 16 % Asia-Pacific 12 % 11 % Total 17 % 18 % Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses, inclusive of both acquisitions and organic growth, was primarily due to (i) $4.5 million of higher compensation costs, including general salaries, bonuses and headcount growth (671 Americas general and administrative employees as of June 30, 2011 versus 504 as of June 30, 2010), and (ii) $1.5 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions, which has included taking on additional office space to accommodate the headcount growth, as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease. 37 -------------------------------------------------------------------------------- Table of Contents EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to $1.2 million of higher professional services related to various consulting projects to support our growth. During the three months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the three months ended June 30, 2010, resulting in approximately $1.3 million of unfavorable foreign currency impact to our EMEA general and administrative expenses during the three months ended June 30, 2011 when compared to average exchange rates of the three months ended June 30, 2010. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease. Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $1.2 million of higher compensation costs, including general salaries, bonuses and headcount growth (143 Asia-Pacific general and administrative employees as of June 30, 2011 versus 116 as of June 30, 2010). For the three months ended June 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the three months ended June 30, 2010. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease. Restructuring Charges. During the three months ended June 30, 2011 and 2010, we recorded restructuring charges totaling $103,000 and $4.4 million, respectively, primarily related to one-time termination benefits attributed to certain Switch and Data employees. Acquisition Costs. During the three months ended June 30, 2011, we recorded acquisition costs totaling $1.6 million primarily related to the ALOG acquisition. During the three months ended June 30, 2010, we recorded acquisition costs totaling $5.8 million related to the Switch and Data acquisition. We do not expect to incur significant additional acquisition costs related to the ALOG acquisition. Our acquisition costs primarily all relate to our Americas geographic region. Interest Income. Interest income increased to $632,000 for the three months ended June 30, 2011 from $491,000 for the three months ended June 30, 2010. The increase was primarily due to higher yields for new investments in Brazil and France. The average yield for the three months ended June 30, 2011 was 0.55% versus 0.20% for the three months ended June 30, 2010. Although we expect our interest income to increase slightly on a prospective basis as a result of the proceeds from the 7.00% senior notes offering, we generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries and from the utilization of cash to finance our expansion activities. Interest Expense. Interest expense for the three months ended June 30, 2011 and 2010 was $37.7 million and $37.6 million, respectively. During the three months ended June 30, 2011 and 2010, we capitalized $3.3 million and $3.0 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering beginning in July 2011, which is approximately $53.9 million annually. Loss on debt extinguishment and interest rate swaps, net. During the three months ended June 30, 2011, no loss on debt extinguishment and interest rate swaps, net was recorded. During the three months ended June 30, 2010, we recorded a $1.5 million loss on debt extinguishment and interest rate swaps, net, primarily related to the write-off of debt issuance costs as a result of repaying and terminating the Asia-Pacific financing and Singapore financing. 38 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense). For the three months ended June 30, 2011, we recorded $1.0 million of other income, primarily due to foreign currency exchange gains during the period. For the three months ended June 30, 2010, we recorded $1.5 million of other expense, primarily due to foreign currency exchange losses during the period. Income Taxes. For the three months ended June 30, 2011 and 2010, we recorded $8.1 million and $2.4 million of income tax expenses, respectively. Our effective tax rate was 20.9% for the three months ended June 30, 2011. During the three months ended June 30, 2010, our effective tax rate was not meaningful for comparison purposes because of an increase in the amount of foreign losses not benefited in our effective tax rate and an expected decline in our income before income taxes in the U.S. resulting from the effects of the Switch and Data acquisition. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes. Six Months Ended June 30, 2011 and 2010 Revenues. Our revenues were generated from the following revenue classifications and geographic regions (dollars in thousands): Six months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas: Recurring revenues $ 468,588 62 % $ 328,211 60 % 43 % n/a Non-recurring revenues 17,828 2 % 11,991 2 % 49 % n/a 486,416 64 % 340,202 62 % 43 % n/a EMEA: Recurring revenues 155,834 21 % 120,109 22 % 30 % 22 % Non-recurring revenues 14,816 2 % 10,139 2 % 46 % 38 % 170,650 23 % 130,248 24 % 31 % 23 % Asia-Pacific: Recurring revenues 96,015 13 % 71,033 13 % 35 % 22 % Non-recurring revenues 4,848 1 % 3,260 1 % 49 % 38 % 100,863 14 % 74,293 14 % 36 % 23 % Total: Recurring revenues 720,437 95 % 519,353 95 % 39 % 35 % Non-recurring revenues 37,492 5 % 25,390 5 % 48 % 43 % $ 757,929 100 % $ 544,743 100 % 39 % 36 % Americas Revenues. The increase in our Americas revenues was primarily due to (i) $97.6 million of incremental revenue from the impact of the Switch and Data acquisition and the ALOG acquisition and (ii) an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers including $8.0 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas, Silicon Valley and Washington, D.C. metro areas. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Chicago, New York and Washington, D.C. metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers' contracts. 39-------------------------------------------------------------------------------- Table of Contents EMEA Revenues. Our revenues from Germany and the U.K., the largest revenue contributors in the EMEA region for the period, each represented approximately 34% of the regional revenues during the six months ended June 30, 2011. During the six months ended June 30, 2010, our revenues from Germany, the largest revenue contributor in the EMEA region for the period, represented approximately 36% of the regional revenues. Our EMEA 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 data centers. During the six months ended June 30, 2011, we recorded approximately $4.5 million of revenue from our recently-opened IBX data center expansions in the London and Paris metro areas. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $10.3 million of favorable foreign currency impact to our EMEA revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data center expansions and additional IBX data center expansions currently taking place in the Amsterdam, Frankfurt and Paris metro areas, which are expected to open during 2011 and 2012. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers' contracts. Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 40% and 37%, respectively, of the regional revenues for the six months ended June 30, 2011 and 2010. Our 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 data centers. During the six months ended June 30, 2011, we recorded approximately $1.2 million of revenue generated from our IBX data center expansions in the Singapore, Sydney and Tokyo metro areas. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the six months ended June 30, 2010, resulting in approximately $9.4 million of favorable foreign currency impact to our Asia-Pacific revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX data center expansions and the additional IBX data center expansion currently taking place in the Hong Kong metro area which is expected to open during the remainder of 2011. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, or changes or amendments to customers' contracts. 40 -------------------------------------------------------------------------------- Table of Contents Cost of Revenues. Our cost of revenues was split among the following geographic regions (dollars in thousands): Six months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas $ 250,054 61 % $ 172,489 58 % 45 % n/a EMEA 103,144 25 % 83,510 28 % 24 % 16 % Asia-Pacific 56,950 14 % 39,633 14 % 44 % 31 % Total $ 410,148 100 % $ 295,632 100 % 39 % 35 % Six months ended June 30, 2011 2010 Cost of revenues as a percentage of revenues: Americas 51 % 51 % EMEA 60 % 64 % Asia-Pacific 56 % 53 % Total 54 % 54 % Americas Cost of Revenues. Our Americas cost of revenues for the six months ended June 30, 2011 and 2010 included $93.5 million and $63.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to both our organic IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in Americas cost of revenues included $43.6 million of incremental cost of revenues resulting from the Switch and Data acquisition and the ALOG acquisition. In addition, excluding the impact of the Switch and Data acquisition and the ALOG acquisition, we incurred incremental costs associated with our organic expansion projects and revenue growth, such as (i) $2.2 million of higher utility costs arising from increased customer installations and revenues attributed to customer growth and (ii) $1.2 million of higher rent and facility costs. We expect Americas cost of revenues to increase as we continue to grow our business. EMEA Cost of Revenues. EMEA cost of revenues for the six months ended June 30, 2011 and 2010 included $31.6 million and $25.0 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation expense, the increase in EMEA cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $3.1 million of higher compensation expense, including general salaries, bonuses and headcount growth (266 EMEA cost of revenues employees as of June 30, 2011 versus 219 as of June 30, 2010), (ii) an increase of $4.6 million in utility costs arising from increased customer installations and revenues attributed to customer growth and (iii) $1.6 million of higher professional costs related to various consulting projects to support our growth. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $6.6 million of unfavorable foreign currency impact to our EMEA cost of revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We expect EMEA 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, 2011 and 2010 included $18.6 million and $12.7 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. Excluding depreciation 41-------------------------------------------------------------------------------- Table of Contents expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $4.1 million of rent and facility costs and (ii) $4.0 million in higher utility costs. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the six months ended June 30, 2010, resulting in approximately $5.1 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. 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 were split among the following geographic regions (dollars in thousands): Six months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas $ 45,494 64 % $ 31,458 65 % 45 % n/a EMEA 17,137 24 % 10,906 23 % 57 % 47 % Asia-Pacific 8,068 12 % 6,017 12 % 34 % 26 % Total $ 70,699 100 % $ 48,381 100 % 46 % 42 % Six months ended June 30, 2011 2010 Sales and marketing expenses as a percentage of revenues: Americas 9 % 9 % EMEA 10 % 8 % Asia-Pacific 8 % 8 % Total 9 % 9 % Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses, inclusive of both acquisitions and organic growth, was primarily due to (i) $7.1 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (264 Americas sales and marketing employees as of June 30, 2011 versus 187 as of June 30, 2010), (ii) $1.9 million of higher bad debt expense, which is partially due to the revenue growth as discussed above and partially due to the growth of the Americas collection team that has initiated additional collection efforts and procedures, and (iii) $1.5 million of higher recruiting costs. We have been investing in our Americas sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased and are expected to continue to increase. In the long-term, we generally expect Americas 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 generally expect them to decrease in the long-term. 42-------------------------------------------------------------------------------- Table of Contents EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to $4.4 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (99 EMEA sales and marketing employees as of June 30, 2011 versus 67 as of June 30, 2010) and higher professional fees to support our growth. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $1.1 million of unfavorable foreign currency impact to our EMEA sales and marketing expenses during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. We intend to invest further in our EMEA sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our EMEA sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect EMEA 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 generally expect them to decrease in the long-term. Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (63 Asia-Pacific sales and marketing employees as of June 30, 2011 versus 52 as of June 30, 2010). For the six months ended June 30, 2011, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the six months ended June 30, 2010. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia-Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific 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 generally expect them to decrease in the long-term. General and Administrative Expenses. Our general and administrative expenses were split among the following geographic regions (dollars in thousands): Six months ended June 30, % Change Constant 2011 % 2010 % Actual currency Americas $ 91,956 72 % $ 68,925 71 % 33 % n/a EMEA 24,706 19 % 19,839 20 % 25 % 17 % Asia-Pacific 11,620 9 % 8,557 9 % 36 % 25 % Total $ 128,282 100 % $ 97,321 100 % 32 % 29 % Six months ended June 30, 2011 2010 General and administrative expenses as a percentage of revenues: Americas 19 % 20 % EMEA 14 % 15 % Asia-Pacific 12 % 12 % Total 17 % 18 % Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses, inclusive of both acquisitions and organic growth, was primarily due to (i) $13.6 million of higher compensation costs, including general salaries, bonuses and headcount growth (671 Americas general and administrative employees as of June 30, 2011 versus 504 as of June 30, 2010), and (ii) $4.7 million of higher depreciation expense as a result of our ongoing efforts to support our growth, such as investments in systems. Over the course of the past year, we have been investing in our Americas general and administrative functions, which has included taking on additional office space to accommodate the headcount growth, as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including further investment in our back office systems; however, as a percentage of revenues, we generally expect them to decrease. 43 -------------------------------------------------------------------------------- Table of Contents EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to (i) $2.3 million of higher compensation costs, including general salaries, bonuses and headcount growth (163 EMEA general and administrative employees as of June 30, 2011 versus 143 as of June 30, 2010) and (ii) $1.8 million of higher professional fees related to various consulting projects to support our growth. During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the British pound, Euro and Swiss Franc than during the six months ended June 30, 2010, resulting in approximately $1.6 million of unfavorable foreign currency impact to our EMEA general and administrative expenses during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. Over the course of the past year, we have been investing in our EMEA general and administrative functions as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our EMEA general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease. Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $1.9 million of higher compensation costs, including general salaries, bonuses and headcount growth (143 Asia-Pacific general and administrative employees as of June 30, 2011 versus 116 as of June 30, 2010). During the six months ended June 30, 2011, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the six months ended June 30, 2010, resulting in approximately $1.0 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the six months ended June 30, 2011 when compared to average exchange rates of the six months ended June 30, 2010. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease. Restructuring Charges. During the six months ended June 30, 2011 and 2010, we recorded restructuring charges totaling $599,000 and $4.4 million, respectively, primarily related to one-time termination benefits attributed to certain Switch and Data employees. Acquisition Costs. During the six months ended June 30, 2011, we recorded acquisition costs totaling $2.0 million primarily related to the ALOG acquisition. During the six months ended June 30, 2010, we recorded acquisition costs totaling $10.8 million related to the Switch and Data acquisition. We do not expect to incur significant additional acquisition costs related to the ALOG acquisition. Our acquisition costs primarily all relate to our Americas geographic region. Interest Income. Interest income decreased to $847,000 for the six months ended June 30, 2011 from $997,000 for the six months ended June 30, 2010. Interest income decreased primarily due to lower invested balances. The average yield for the six months ended June 30, 2011 was 0.43% versus 0.19% for the six months ended June 30, 2010. Although we expect our interest income to increase slightly on a prospective basis as a result of the proceeds from the 7.00% senior notes offering, we generally expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries, and from the utilization of cash to finance our expansion activities. 44-------------------------------------------------------------------------------- Table of Contents Interest Expense. Interest expense increased to $75.0 million for the six months ended June 30, 2011 from $63.3 million for the six months ended June 30, 2010. This increase in interest expense was primarily due to the full impact of our $750.0 million 8.125% senior notes, additional financings such as capital lease and other financing obligations to support our expansion projects and additional advances from our new Asia-Pacific financing. This increase was partially offset by repayments of the Chicago IBX financing in March 2010, the European financing in April 2010, the Netherlands financing in June 2010 and mortgage payable in December 2010. During the six months ended June 30, 2011 and 2010, we capitalized $5.9 million and $6.7 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur significantly higher interest expense as we recognize the full impact of the 7.00% senior notes offering beginning in July 2011, which is approximately $53.9 million annually. Other-Than-Temporary Impairment Recovery On Investments. During the six months ended June 30, 2011, no other-than-temporary impairment loss or recovery on investments was recorded. During the six months ended June 30, 2010, we recorded a $3.4 million other-than-temporary impairment recovery on investments due to an additional distribution from one of our money market accounts we had previously written down during 2008 and 2009. Loss on debt extinguishment and interest rate swaps, net. During the six months ended June 30, 2011, no loss on debt extinguishment and interest rate swaps, net was recorded. During the six months ended June 30, 2010, we recorded a $4.8 million loss on debt extinguishment and interest rate swaps, net, which is comprised of (i) a net gain of $2.7 million representing principal discount/premium and the write-off of related debt issuance costs and (ii) a loss of $7.5 million primarily resulted from the termination of an interest rate swap associated with the Chicago IBX financing as a result of repaying and terminating the Chicago IBX financing in March 2010 and the write-off of interest rate swaps associated with the European financing due to these interest rate swaps no longer being effective hedges as a result of repaying and terminating the European financing in April 2010. Other Income (Expense). For the six months ended June 30, 2011, we recorded $3.1 million of other income, primarily due to foreign currency exchange gains during the period. For the six months ended June 30, 2010, we recorded $1.5 million of other expense, primarily due to foreign currency exchange losses during the period. Income Taxes. For the six months ended June 30, 2011 and 2010, we recorded $19.2 million and $11.1 million of income tax expenses, respectively. Our effective tax rates were 25.6% and 48.3% for the six months ended June 30, 2011and 2010, respectively. Our effective tax rate in the six months ended June 30, 2011 was lower than the six months ended June 30, 2010 due to increased foreign losses benefited in 2011. The cash taxes for 2011 and 2010 are primarily for state income taxes and foreign income taxes. Non-GAAP Financial Measures We provide all information required in accordance with generally accepted accounting principles (GAAP), but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, we use non-GAAP financial measures, primarily adjusted EBITDA, to evaluate our operations. We also use adjusted EBITDA as a metric in the determination of employees' annual bonuses and vesting of restricted stock units that have both a service and performance condition. In presenting adjusted EBITDA, we exclude certain items that we believe are not good indicators of our current or future operating performance. These items are depreciation, amortization, accretion of asset retirement obligations and accrued restructuring charges, stock-based compensation, restructuring charges and acquisition costs. Legislative and regulatory requirements encourage the use of and emphasis on GAAP financial metrics and require companies to explain why 45-------------------------------------------------------------------------------- Table of Contents non-GAAP financial metrics are relevant to management and investors. We exclude these items in order for our lenders, investors, and industry analysts, who review and report on us, to better evaluate our operating performance and cash spending levels relative to our industry sector and competitors. For example, we exclude depreciation expense as these charges primarily relate to the initial construction costs of our IBX data centers and do not reflect our current or future cash spending levels to support our business. Our IBX data centers are long-lived assets, and have an economic life greater than 10 years. The construction costs of our IBX data centers do not recur and future capital expenditures remain minor relative to our initial investment. This is a trend we expect to continue. In addition, depreciation is also based on the estimated useful lives of our IBX data centers. These estimates could vary from actual performance of the asset, are based on historical costs incurred to build out our IBX data centers, and are not indicative of current or expected future capital expenditures. Therefore, we exclude depreciation from our operating results when evaluating our operations. In addition, in presenting the non-GAAP financial measures, we exclude amortization expense related to certain intangible assets, as it represents a cost that may not recur and is not a good indicator of our current or future operating performance. We exclude accretion expense, both as it relates to asset retirement obligations as well as accrued restructuring charge liabilities, as these expenses represent costs which we believe are not meaningful in evaluating our current operations. We exclude non-cash stock-based compensation expense as it represents expense attributed to equity awards that have no current or future cash obligations. As such, we, and many investors and analysts, exclude this stock-based compensation expense when assessing the cash generating performance of our operations. We also exclude restructuring charges from our non-GAAP financial measures. The restructuring charges relate to our decisions to exit leases for excess space adjacent to several of our IBX data centers, which we did not intend to build out or our decision to reverse such restructuring charges, or severance charges related to the Switch and Data acquisition. Finally, we also exclude acquisition costs from our non-GAAP financial measures. The acquisition costs relate to costs we incur in connection with business combinations. Management believes such items as restructuring charges and acquisition costs are non-core transactions; however, these types of costs will or may occur in future periods. Our management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. However, we have presented such non-GAAP financial measures to provide investors with an additional tool to evaluate our operating results in a manner that focuses on what management believes to be our core, ongoing business operations. We believe that the inclusion of this non-GAAP financial measure provides consistency and comparability with past reports and provides a better understanding of the overall performance of the business and its ability to perform in subsequent periods. We believe that if we did not provide such non-GAAP financial information, investors would not have all the necessary data to analyze Equinix effectively. Investors should note, however, that the non-GAAP financial measures used by us may not be the same non-GAAP financial measures, and may not be calculated in the same manner, as that of other companies. In addition, whenever we use non-GAAP financial measures, we provide a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure. 46-------------------------------------------------------------------------------- Table of Contents We define adjusted EBITDA as income or loss from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges and acquisition costs as presented below (dollars in thousands): Three months ended Six months ended June 30, June 30, 2011 2010 2011 2010 Income from operations $ 74,866 $ 40,227 $ 146,171 $ 88,209 Depreciation, amortization and accretion expense 86,426 63,626 165,951 112,948 Stock-based compensation expense 18,318 18,096 33,853 33,070 Restructuring charges 103 4,357 599 4,357 Acquisitions costs 1,615 5,849 2,030 10,843 Adjusted EBITDA $ 181,328 $ 132,155 $ 348,604 $ 249,427 The geographic split of our adjusted EBITDA is presented below (dollars in thousands): Three months ended Six months ended June 30, June 30, 2011 2010 2011 2010 Americas: Income from operations $ 49,072 $ 22,529 $ 96,391 $ 52,130 Depreciation, amortization and accretion expense 57,246 43,081 110,728 71,255 Stock-based compensation expense 14,527 13,650 26,369 24,663 Restructuring charges 103 4,357 599 4,357 Acquisitions costs 1,556 5,849 1,922 10,843 Adjusted EBITDA $ 122,504 $ 89,466 $ 236,009 $ 163,248 EMEA: Income from operations $ 14,178 $ 7,672 $ 25,649 $ 15,993 Depreciation, amortization and accretion expense 18,512 13,737 35,356 28,221 Stock-based compensation expense 2,147 2,531 4,442 4,681 Acquisitions costs 12 - 14 - Adjusted EBITDA $ 34,849 $ 23,940 $ 65,461 $ 48,895 Asia-Pacific: Income from operations $ 11,616 $ 10,026 $ 24,131 $ 20,086 Depreciation, amortization and accretion expense 10,668 6,808 19,867 13,472 Stock-based compensation expense 1,644 1,915 3,042 3,726 Acquisitions costs 47 - 94 - Adjusted EBITDA $ 23,975 $ 18,749 $ 47,134 $ 37,284 Our adjusted EBITDA results have improved each year and in each region due to the improved operating results discussed earlier in "Results of Operations", as well as the nature of our business model consisting of a recurring revenue stream and a cost structure which has a large base that is fixed in nature that is also discussed earlier in "Overview". We believe that our adjusted EBITDA results will continue to improve in future periods as we continue to grow our business. Liquidity and Capital Resources As of June 30, 2011, 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 47-------------------------------------------------------------------------------- Table of Contents subordinated notes, and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible debt and financing obligations totaling $1.3 billion consisting of (a) $750.0 million of principal from our 8.125% senior notes, (b) $232.7 million of principal from our loans payable and (c) $346.7 million from our capital lease and other financing obligations. However, in July 2011, our non-convertible debt and financing obligations increased to $2.1 billion as a result of the 7.00% senior notes offering. We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of our current portion of debt due, and to complete our publicly-announced expansion projects. As of June 30, 2011, we had $423.1 million of cash, cash equivalents and short-term and long-term investments and in July 2011, we received net proceeds from the 7.00% senior notes offering of approximately $735.6 million. Besides our investment portfolio and any further financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity. As of June 30, 2011, we had a total of approximately $23.8 million of additional liquidity available to us, consisting of (i) approximately $17.7 million under the new Asia-Pacific financing and (ii) $6.1 million under the $25.0 million Bank of America revolving credit line. 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 data 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 these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain new or unannounced additional expansion plans. However, if current market conditions were to deteriorate, we may be unable to secure additional financing or any such additional financing may only 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, 2011 2010 (in thousands) Net cash provided by operating activities $ 258,118 $ 156,718 Net cash used in investing activities (496,126 ) (359,012 ) Net cash provided by financing activities 87,964 377,563 Operating Activities. The increase in net cash provided by operating activities was primarily due to improved operating results and improved collections of accounts receivable and growth in customer installations, which increases deferred installation revenue. Although customer collections improved in the six months ended June 30, 2011 as compared to June 30, 2010, customer collections can vary widely from quarter to quarter. It is not uncommon for some large customer receivables that were anticipated to be collected in one quarter to slip to the next quarter. For example, some large customer receivables that were anticipated to be collected in June 2011 actually were collected in July 2011 instead, which negatively impacted cash flows from operating activities for the six months ended June 30, 2011. However, overall, customer collections remain relatively strong. We expect that we will continue to generate cash from our operating activities during the remainder of 2011 and beyond. Investing Activities. The increase in net cash used in investing activities was primarily due to higher capital expenditures as a result of expansion activity and increase in restricted cash. During the six months ended June 30, 2011 and 2010, these capital expenditures were $364.0 million and $292.1 million, respectively. We expect that our IBX expansion construction activity will be at consistent levels. However, if the opportunity to expand is greater than planned and we have sufficient funding to increase the expansion opportunities available to us, we may increase the level of capital expenditures to support this growth. 48 -------------------------------------------------------------------------------- Table of Contents Financing Activities. Higher net cash provided by financing activities for the six months ended June 30, 2010 was primarily due to our $750.0 million 8.125% senior notes offering in February 2010, partially offset by repayment of our debt facilities, including the Chicago IBX financing, the European financing, the Asia-Pacific financing, the Singapore financing and the Netherlands financing; however, the Asia-Pacific financing and the Singapore financing were replaced by the new Asia-Pacific financing. We expect that our financing activities will consist primarily of the proceeds from the 7.00% senior notes offering, partially offset by the repayment of our debt during the remainder of 2011. Debt Obligations New Asia-Pacific Financing. During the six months ended June 30, 2011, we received additional advances totaling approximately $77.9 million under the new Asia-Pacific financing, leaving the amount available to borrow totaling approximately $17.7 million. The outstanding loans payable under the new Asia-Pacific financing had a blended interest rate of 5.19% as of June 30, 2011. As of June 30, 2011, we were in compliance with all financial covenants associated with the new Asia-Pacific financing. Paris 4 IBX Financing. In March 2011, we entered into two agreements with two unrelated parties to purchase and develop a building that will ultimately become our fourth IBX data center in the Paris metro area. The first agreement allowed us the right to purchase the property for a total fee of approximately $21.8 million payable to a company that held exclusive rights (including power rights) to the property and was already in the process of developing the property into a data center and will now, instead, become the anchor tenant in the Paris 4 IBX data center once it is open for business. The second agreement was entered into with the developer of the property and allowed us to take immediate title to the building and associated land and also requires the developer to construct the data center to our specifications and deliver the completed data center to us in July 2012 for a total fee of approximately $109.9 million. Both agreements include extended payment terms. We made payments under both agreements totaling approximately $35.7 million in March 2011 and the remaining payments due totaling approximately $96.0 million are payable on various dates through March 2013, which is referred to as Paris 4 IBX financing. Of the amounts paid or payable under the Paris 4 IBX financing, a total of $15.0 million was allocated to land and building assets, $3.7 million was allocated to a deferred charge, which will be netted against revenue associated with the anchor tenant of the Paris 4 IBX data center over the term of the customer contract, and the remainder totaling $113.0 million was or will be allocated to construction costs inclusive of interest charges. We have imputed an interest rate of 5.90% per annum on the Paris 4 IBX financing as of June 30, 2011, a total of $20.6 million was outstanding under the Paris 4 IBX financing. We will record additional construction costs and increase the Paris 4 IBX financing liability over the course of the construction period. The Paris 4 IBX financing also required us to post approximately $96.9 million of cash into a restricted cash account to ensure liquidity for the developer during the construction period. 49-------------------------------------------------------------------------------- Table of Contents 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 2035. The following represents our debt maturities, financings, leases and other contractual commitments as of June 30, 2011 (in thousands): 2011 (6 months) 2012 2013 2014 2015 Thereafter Total Convertible debt (1) $ - $ 250,000 $ - $ 395,986 $ - $ 373,750 $ 1,019,736 Senior notes (1) - - - - - 750,000 750,000 New Asia-Pacific financing (1) 10,353 35,150 55,012 59,860 32,469 - 192,844 Paris 4 IBX financing (2) - 87,824 6,823 - - - 94,647 ALOG debt (1) 3,435 6,792 3,775 3,590 1,501 161 19,254 Interest (3) 54,487 104,042 97,670 91,678 79,031 161,391 588,299Capital lease and other financing obligations (4) 17,396 36,968 37,644 39,226 40,654 334,590 506,478 Operating leases under accrued restructuring charges (5) 1,684 2,429 2,444 2,459 1,444 - 10,460 Operating leases (6) 58,029 115,797 116,736 110,954 92,975 507,168 1,001,659 Other contractual commitments (7) 265,863 82,456 3,244 1,700 - - 353,263 Asset retirement obligations (8) 378 - 1,043 1,244 5,651 45,801 54,117 ALOG acquisition contingent consideration (9) - - 23,070 - - - 23,070 Redeemable non-controlling interests - - - 69,050 - - 69,050 $ 411,625 $ 721,458 $ 347,461 $ 775,748 $ 253,725 $ 2,172,860 $ 4,682,877 (1) Represents principal only. (2) Represents total payments to be made to complete the construction of the Paris 4 IBX center. (3) Represents interest on convertible debt, 8.125% senior notes and new Asia-Pacific financing based on their approximate interest rates as of June 30, 2011. (4) Represents principal and interest. (5) Excludes any subrental income. (6) Represents minimum operating lease payments, excluding potential lease renewals. (7) Represents off-balance-sheet arrangements. Other contractual commitments are described below. (8) Represents liability, net of future accretion expense. (9) Represents an off-balance sheet arrangement for the ALOG acquisition contingent consideration and includes the portion of the contingent consideration that will be funded by Riverwood. In connection with certain of our leases, we entered into 14 irrevocable letters of credit totaling $18.9 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 renew in successive one-year periods until the final lease expiration date. If the landlords for these IBX leases decide to draw down on these letters of credit triggered by an event of default under the lease, we will be required to fund these letters of credit either through cash collateral or borrowing under the $25.0 million Bank of America revolving credit line. These contingent commitments are not reflected in the table above. We had accrued liabilities related to uncertain tax positions totaling approximately $17.5 million as of June 30, 2011. These liabilities, which are reflected on our balance sheet, are not reflected in the table above since it is unclear when these liabilities would be paid. As a result of the 7.00% senior notes offering due 2021, our senior notes increased to $1.5 billion in July 2011 and we expect to incur additional interest expense of $53.9 million annually. Primarily as a result of our various IBX expansion projects, as of June 30, 2011, we were contractually committed for $234.5 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 data centers prior to making them available to customers for installation. This amount, which is expected to be paid during the remainder of 2011 and 2012, is reflected in the table above as "Paris 4 IBX financing" and "other contractual commitments." 50-------------------------------------------------------------------------------- Table of Contents We had other non-capital purchase commitments in place as of June 30, 2011, such as commitments to purchase power in select locations and other open purchase orders, which contractually bind us for goods or services to be delivered or provided during the remainder of 2011 and beyond. Such other purchase commitments as of June 30, 2011, which total $118.8 million, are also reflected in the table above as "other contractual commitments." In addition, although we are not contractually obligated to do so, we expect to incur additional capital expenditures of approximately $300.0 million to $350.0 million, in addition to the $234.5 million in contractual commitments discussed above as of June 30, 2011, in our various IBX expansion projects during the remainder of 2011 and thereafter in order to complete the work needed to open these IBX data centers. These non-contractual capital expenditures are not reflected in the table above. If we so choose, whether due to economic factors or other considerations, we could delay these non-contractual capital expenditure commitments to preserve liquidity. Critical Accounting Policies and 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 business combinations, accounting for impairment of goodwill and accounting for property, plant and equipment, which are discussed in more detail under the caption "Critical Accounting Policies and 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, 2010. Recent Accounting Pronouncements See Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. [ Back To TMCnet.com's Homepage ]