[April 26, 2013] 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 In April 2013, as more fully described in Note 14 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we redeemed all of our $750.0 million 8.125% senior notes. As a result, we incurred an $89.9 million loss on debt extinguishment, which will be recognized during the three months ended June 30, 2013. In March 2013, as more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we issued $1.5 billion aggregate principal amount of senior notes, which is referred to as the senior notes offering, consisting of $500.0 million aggregate principal amount of 4.875% senior notes due April 1, 2020, which are referred to as the 4.875% senior notes, and $1.0 billion aggregate principal amount of 5.375% senior notes due April 1, 2023, which are referred to as the 5.375% senior notes. We used a portion of the net proceeds from the senior notes offering for the redemption of our 8.125% senior notes and intend to use the remaining net proceeds for general corporate purposes, including the funding of our expansion activities and distributions to our stockholders in connection with our proposed conversion to a real estate investment trust, which is referred to as a REIT. 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 31 markets around the world for the safehousing of their critical IT equipment and the ability to directly connect to the networks that enable today's information-driven economy. Equinix offers the following solutions: (i) premium data center colocation, (ii) interconnection and (iii) exchange and outsourced IT infrastructure services. As of March 31, 2013, we operated or had partner IBX data centers in the Atlanta, Boston, Chicago, Dallas, Denver, Los Angeles, Miami, New York, Philadelphia, Rio De Janeiro, Sao Paulo, Seattle, Silicon Valley, Toronto and Washington, D.C. metro areas in the Americas region; France, Germany, Italy, the Netherlands, 31-------------------------------------------------------------------------------- Table of Contents Switzerland, the United Arab Emirates and the United Kingdom in the EMEA region; and Australia, Hong Kong, Indonesia, Japan, China and Singapore in the Asia-Pacific region. We leverage our global data centers in 31 markets around the world as a global platform which allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global platform and the quality of our IBX data centers, we believe we have established a critical mass of customers. As more customers locate in our IBX data centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our offerings. These partners, in turn, pull in their business partners, creating a "marketplace" for their services. Our global platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange 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 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 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 solutions in the U.S. alone. Each of these data center solutions providers can bundle various colocation, interconnection and network offerings, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 15 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of offerings. Excluding the impact of acquisitions of the Dubai IBX data center, Asia Tone Limited, referred to as Asia tone, and ancotel GmbH, referred to as ancotel, our customer count increased to approximately 6,228 as of March 31, 2013 versus approximately 5,661 as of March 31, 2012, an increase of 10%. 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 Asia Tone and ancotel, our utilization rate decreased to approximately 75% as of March 31, 2013 versus approximately 81% as of March 31, 2012; however, excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our utilization rate would have increased to approximately 83% as of March 31, 2013. 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 offerings. As was the case with our recent expansions and acquisitions, our expansion criteria will be dependent on a number of factors such as demand from new and existing customers, quality of the design, power capacity, access to networks, capacity availability in the current market location, amount of incremental investment required by us in the targeted property, lead-time to break-even on a free cash flow basis and in-place customers. Like our recent expansions and acquisitions, the right combination of these factors may be attractive to us. Depending on the circumstances, these transactions may require additional capital expenditures funded by upfront cash 32 -------------------------------------------------------------------------------- Table of Contents payments or through long-term financing arrangements in order to bring these properties up to Equinix standards. Property expansion may be in the form of purchases of real property, long-term leasing arrangements or acquisitions. Future purchases, construction or acquisitions may be completed by us or with partners or potential customers to minimize the outlay of cash, which can be significant. Our business is based on a recurring revenue model comprised of colocation and related interconnection and managed infrastructure offerings. We consider these offerings recurring because our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three years in length. Our recurring revenues have comprised more than 90% of our total revenues during the past three years. In addition, during 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 because 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 recognized when no remaining performance obligations exist and collectability is reasonably assured, to the extent that the revenue has not previously been recognized. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future. Our Americas revenues are derived primarily from colocation and related interconnection offerings, and 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 generally increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by 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. 33 -------------------------------------------------------------------------------- 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 about 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 the EMEA or Asia-Pacific region, as well as a higher cost structure outside of the 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 the 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 the Americas grows in greater proportion than revenue growth in the Americas, our overall cost of revenues as a percentage of revenues may increase in future periods. Sales and marketing expenses 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. Potential REIT Conversion On September 13, 2012, we announced that our board of directors approved a plan for Equinix to pursue conversion to a REIT. We have begun implementation of the REIT conversion, and we plan to make a tax election for REIT status for the taxable year beginning January 1, 2015. Any REIT election made by us must be effective as of the beginning of a taxable year; therefore, as a calendar year taxpayer, if we are unable to convert to a REIT by January 1, 2015, the next possible conversion date would be January 1, 2016. If we are able to convert to and qualify as a REIT, we will generally be permitted to deduct from federal income taxes the dividends we pay to our stockholders. The income represented by such dividends would not be subject to federal taxation at the entity level but would be taxed, if at all, at the stockholder level. Nevertheless, the income of our domestic taxable REIT subsidiaries, or TRS, which will hold our U.S. operations that may not be REIT-compliant, will be subject, as applicable, to federal and state corporate income tax. Likewise, our foreign subsidiaries will continue to be subject to foreign income taxes in jurisdictions in which they hold assets or conduct operations, regardless of whether held or conducted through TRS or through qualified REIT subsidiaries, or QRS. We will also be subject to a separate corporate income tax on any gains recognized during a specified period (generally 10 years) following the REIT conversion that are attributable to "built-in" gains with respect to the assets that we own on the date we convert to a REIT. Our ability to qualify as a REIT will depend upon our continuing compliance following our REIT conversion with various requirements, including requirements related to the nature of our assets, the sources of our income and the distributions to our stockholders. If we fail to qualify as a REIT, we will be subject to federal income tax at regular corporate rates. Even if we qualify for taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property. In particular, while state income tax regimes often parallel the federal income tax regime for REITs described above, many states do not completely follow federal rules and some may not follow them at all. The REIT conversion implementation currently includes seeking a private letter ruling, or PLR, from the IRS. Our PLR request has multiple components, and the conversion to a REIT will require favorable rulings from the IRS on numerous technical tax issues, including classification of our data center assets as qualified real estate assets. We submitted the PLR request to the IRS in 2012, but the IRS may not provide a PLR until late in 2013 or at all. We currently estimate that we will incur approximately $50.0 to $80.0 million in costs to support the REIT conversion, in addition to related tax liabilities associated with a change in our method of depreciating and amortizing various data center assets for tax purposes from our prior method to current 34-------------------------------------------------------------------------------- Table of Contents methods that are more consistent with the characterization of such assets as real property for REIT purposes. The total recapture of depreciation and amortization expenses across all relevant assets is expected to result in federal and state tax liability of approximately $340.0 to $420.0 million, which amount will be payable in the four-year period starting in 2012 even if we abandon the REIT conversion for any reason, including the failure to receive the PLR we are seeking. Prior to the decision to convert to a REIT, our balance sheet reflected our income tax liability as a non-current deferred tax liability. As a result of the decision to convert to a REIT, our non-current tax liability will be gradually and proportionally reclassified from non-current to current over the four-year period, which started in the third quarter of 2012. The current liability reflects the tax liability that relates to additional taxable income expected to be recognized within the twelve-month period from the date of the balance sheet. If the REIT conversion is successful, we also expect to incur an additional $5.0 to $10.0 million in annual compliance costs in future years. We expect to pay between $150.0 to $225.0 million in cash taxes during 2013. Results of Operations Our results of operations for three months ended March 31, 2013 include the operations of ancotel, Asia Tone and the Dubai IBX data center. 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 reais, British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen, Singapore dollar and United Arab Emirates dirham. 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 with functional 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 March 31, 2012 are used as exchange rates for the three months ended March 31, 2013 when comparing the three months ended March 31, 2013 with the three months ended March 31, 2012). 35-------------------------------------------------------------------------------- Table of Contents Three Months Ended March 31, 2013 and 2012 Revenues. Our revenues for the three months ended March 31, 2013 and 2012 were generated from the following revenue classifications and geographic regions (dollars in thousands): Three months ended March 31, % change Constant 2013 % 2012 % Actual currency Americas: Recurring revenues $ 295,847 57 % $ 270,032 61 % 10 % 11 % Non-recurring revenues 12,707 2 % 9,097 2 % 40 % 40 % 308,554 59 % 279,129 63 % 11 % 12 % EMEA: Recurring revenues 113,282 22 % 91,533 21 % 24 % 24 %Non-recurring revenues 7,012 2 % 9,803 2 % (28 %) (29 %) 120,294 24 % 101,336 23 % 19 % 19 % Asia-Pacific: Recurring revenues 86,142 16 % 59,325 13 % 45 % 48 %Non-recurring revenues 4,465 1 % 3,455 1 % 29 % 36 % 90,607 17 % 62,780 14 % 44 % 47 % Total: Recurring revenues 495,271 95 % 420,890 95 % 18 % 19 %Non-recurring revenues 24,184 5 % 22,355 5 % 8 % 9 % $ 519,455 100 % $ 443,245 100 % 17 % 18 % Americas Revenues. Growth in Americas revenues was primarily due to $10.9 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Dallas, Los Angeles, Miami, New York, Seattle and Washington, D.C. metro areas and 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. During the three months ended March 31, 2013, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian reais than during the three months ended March 31, 2012, resulting in approximately $2.8 million of unfavorable foreign currency impact to our Americas revenues during the three months ended March 31, 2013 when compared to average exchange rates of the three months ended March 31, 2012. We expect that our Americas revenues will continue to grow in future periods as a result of continued growth in the recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Dallas, Rio de Janeiro, Silicon Valley, Toronto and Washington, D.C. metro areas, which are expected to open during the remainder of 2013 and 2014. Our estimates of future revenue growth take account of expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers' contracts. EMEA Revenues. Our revenues from the U.K., the largest revenue contributor in the EMEA region for the period, represented approximately 36% and 40%, respectively, of the regional revenues during the three months ended March 31, 2013 and 2012. Our EMEA revenue growth was due to (i) $6.4 million of additional revenue from the impact of the Dubai IBX data center and ancotel acquisitions, (ii) approximately $7.6 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, London and Paris metro areas and (iii) 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, partially offset by lower non-recurring revenues such as rental revenues and certain custom services provided to our customers. During the three months ended March 31, 2013, the impact of foreign currency fluctuations to our EMEA revenues was not significant when compared to average exchange rates of the three months ended March 31, 2012. We expect that our EMEA revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Frankfurt, London and Zurich metro areas, which are expected to open during the 36 -------------------------------------------------------------------------------- Table of Contents remainder of 2013. 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 37% and 40%, respectively, of the regional revenues for the three months ended March 31, 2013 and 2012. Our Asia-Pacific revenue growth was due to (i) $12.9 million of additional revenue from the impact of the Asia Tone acquisition, (ii) approximately $1.8 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Singapore, Sydney and Tokyo metro areas and (iii) 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. During the three months ended March 31, 2013, the U.S. dollar was generally stronger relative to the Australian dollar and Japanese yen than during the three months ended March 31, 2012, resulting in approximately $2.0 million of unfavorable foreign currency impact to our Asia-Pacific revenues during the three months ended March 31, 2013 when compared to average exchange rates of the three months ended March 31, 2012. 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 additional expansions currently taking place in the Tokyo and Singapore metro areas, which are expected to open during the remainder of 2013. 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 for the three months ended March 31, 2013 and 2012 were split among the following geographic regions (dollars in thousands): Three months ended March 31, % change Constant 2013 % 2012 % Actual currency Americas $ 143,552 55 % $ 128,113 59 % 12 % 13 % EMEA 63,701 25 % 51,138 24 % 25 % 24 % Asia-Pacific 52,015 20 % 37,847 17 % 37 % 41 % Total $ 259,268 100 % $ 217,098 100 % 19 % 21 % Three months ended March 31, 2013 2012 Cost of revenues as a percentage of revenues: Americas 47 % 46 % EMEA 53 % 50 % Asia-Pacific 57 % 60 % Total 50 % 49 % Americas Cost of Revenues. Our Americas cost of revenues for the three months ended March 31, 2013 and 2012 included $53.0 million and $47.1 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding depreciation expense, the increase in our Americas cost of revenues was primarily due to $3.4 million of higher taxes, including property taxes, and $2.5 million of higher costs associated with certain custom services provided to our customers. During the three months ended March 31, 2013, the impact of foreign currency fluctuations to our Americas cost of revenues was not significant when compared to average exchange rates of the three months ended March 31, 2012. We expect Americas cost of revenues to increase as we continue to grow our business. EMEA Cost of Revenues. Our EMEA cost of revenues for the three months ended March 31, 2013 and 2012 included $19.4 million and $15.5 million, respectively, of depreciation expense. Growth in 37-------------------------------------------------------------------------------- Table of Contents depreciation expense was primarily due to our IBX data center expansion activity and acquisitions. Excluding depreciation expense, the increase in our EMEA cost of revenues was primarily due to the impact of the Dubai IBX data center and ancotel acquisitions, which resulted in $2.6 million of additional cost of revenues for the three months ended March 31, 2013, as well as higher utility costs, compensation expense and professional fees to support our growth. During the three months ended March 31, 2013, the impact of foreign currency fluctuations to our EMEA cost of revenues was not significant when compared to average exchange rates of the three months ended March 31, 2012. We expect EMEA cost of revenues to increase as we continue to grow our business. Asia-Pacific Cost of Revenues. Our Asia-Pacific cost of revenues for the three months ended March 31, 2013 and 2012 included $20.5 million and $15.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX data center expansion activity and the Asia Tone acquisition. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily due to the impact of the Asia Tone acquisition, which resulted in $5.5 million of additional cost of revenues, and higher utility costs and rent and facility costs. During the three months ended March 31, 2013, the impact of foreign currency fluctuations to our Asia-Pacific cost of revenues was not significant when compared to average exchange rates of the three months ended March 31, 2012. 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 March 31, 2013 and 2012 were split among the following geographic regions (dollars in thousands): Three months ended March 31, % change Constant 2013 % 2012 % Actual currency Americas $ 35,576 61 % $ 30,928 67 % 15 % 16 % EMEA 15,904 27 % 10,484 22 % 52 % 53 % Asia-Pacific 6,796 12 % 4,998 11 % 36 % 39 % Total $ 58,276 100 % $ 46,410 100 % 26 % 27 % Three months ended March 31, 2013 2012 Sales and marketing expenses as a percentage of revenues: Americas 12 % 11 % EMEA 13 % 10 % Asia-Pacific 8 % 8 % Total 11 % 10 % Americas Sales and Marketing Expenses. The increase in our Americas sales and marketing expenses was primarily due to $4.5 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (347 Americas sales and marketing employees as of March 31, 2013 versus 286 as of March 31, 2012). During the three months ended March 31, 2013, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates of the three months ended March 31, 2012. Over the past several years, we have been investing in our Americas sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Americas sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in Americas sales and marketing initiatives, we believe our Americas sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year but should ultimately decrease as we continue to grow our business. 38 -------------------------------------------------------------------------------- Table of Contents EMEA Sales and Marketing Expenses. The increase in our EMEA sales and marketing expenses was primarily due to (i) $2.5 million of additional sales and marketing expenses from the impact of the Dubai IBX data center and ancotel acquisitions and (ii) $2.8 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (157 EMEA sales and marketing employees as of March 31, 2013 versus 123 as of March 31, 2012). For the three months ended March 31, 2013, the impact of foreign currency fluctuations to our EMEA sales and marketing expenses was not significant when compared to average exchange rates of the three months ended March 31, 2012. Over the past several years, we have been investing in our EMEA sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our EMEA sales and marketing expenses as a percentage of revenues have increased. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, we believe our EMEA sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business. Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $1.2 million of additional sales and marketing expenses from the impact of the Asia Tone acquisition. For the three months ended March 31, 2013, 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 March 31, 2012. Over the past several years, we have been investing in our Asia-Pacific sales and marketing initiatives to further increase our revenue. These investments have included the hiring of additional headcount and new product innovation efforts and, as a result, our Asia-Pacific sales and marketing expenses have increased. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will remain at approximately current levels over the next year or two but should ultimately decrease as we continue to grow our business. General and Administrative Expenses. Our general and administrative expenses for the three months ended March 31, 2013 and 2012 were split among the following geographic regions (dollars in thousands): Three months ended March 31, % change Constant 2013 % 2012 % Actual currency Americas $ 63,431 71 % $ 58,612 75 % 8 % 9 % EMEA 17,744 20 % 12,306 16 % 44 % 45 % Asia-Pacific 8,510 9 % 7,398 9 % 15 % 15 % Total $ 89,685 100 % $ 78,316 100 % 15 % 15 % Three months ended March 31, 2013 2012 General and administrative expenses as a percentage of revenues: Americas 21 % 21 % EMEA 15 % 12 % Asia-Pacific 9 % 12 % Total 17 % 18 % Americas General and Administrative Expenses. The increase in our Americas general and administrative expenses was primarily due to $4.0 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (688 Americas general and administrative employees as of March 31, 2013 versus 671 as of March 31, 2012). During the three 39 -------------------------------------------------------------------------------- Table of Contents months ended March 31, 2013, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared to average exchange rates of the three months ended March 31, 2012. Over the course of the past year, we have been investing in our Americas general and administrative functions to scale this region effectively for growth, which has included additional investments into improving our back office systems. We expect our current efforts to improve our back office systems will continue over the next several years. 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 this investment in our back office systems and the REIT conversion process. EMEA General and Administrative Expenses. The increase in our EMEA general and administrative expenses was primarily due to additional general and administrative expenses from the impact of the Dubai IBX data center and ancotel acquisitions and higher compensation costs. The impact of foreign currency fluctuations to our EMEA general and administrative expenses for the three months ended March 31, 2013 was not significant when compared to average exchange rates of the three months ended March 31, 2012. 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 additional general and administrative expenses from the impact of the Asia Tone acquisition and higher compensation costs. For the three months ended March 31, 2013, 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 March 31, 2012. 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. Acquisition Costs. During the three months ended March 31, 2013, we recorded acquisition costs totaling $3.7 million primarily attributed to Americas region. During the three months ended March 31, 2012, we recorded acquisition costs totaling $675,000 primarily attributed to our Asia-Pacific region. Interest Income. Interest income increased to $747,000 for the three months ended March 31, 2013 from $691,000 for the three months ended March 31, 2012. Interest income increased primarily due to higher yields on foreign invested balances. The average annualized yield for the three months ended March 31, 2013 was 0.27% versus 0.23% for the three months ended March 31, 2012. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a continued low interest rate environment and a portfolio more weighted towards short-term securities. Interest Expense. Interest expense increased to $60.3 million for the three months ended March 31, 2013 from $52.8 million for the three months ended March 31, 2012. This increase in interest expense was primarily due to the impact of our $1.5 billion senior notes offering in March 2013, additional financings such as various capital lease and other financing obligations to support our expansion projects and less capitalized interest expense. During the three months ended March 31, 2013 and 2012, we capitalized $2.9 million and $5.6 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our $1.5 billion senior notes offering, partially offset by the redemption of our 8.125% senior notes in April 2013, which will contribute approximately $17.6 million in interest expense annually. However, we may incur additional indebtedness to support our growth, resulting in higher interest expense. Other Income (Expense). We recorded $459,000 and $154,000, respectively, of other expense for the three months ended March 31, 2013 and 2012, primarily due to foreign currency exchange losses during the periods. 40-------------------------------------------------------------------------------- Table of Contents Income Taxes. For the three months ended March 31, 2013 and 2012, we recorded $12.2 million and $13.9 million of income tax expenses, respectively. Our effective tax rates were 25.1% and 28.6% for the three months ended March 31, 2013 and 2012, respectively. We expect to recognize a lower income tax provision in 2013 due to lower profitability in certain jurisdictions with higher tax rates. In addition, we expect cash income taxes during the remainder of 2013 to increase primarily related to the impacts of recognizing the depreciation and amortization recapture as a result of the change of our method of depreciating and amortizing various data center assets for tax purposes in connection with our REIT conversion plan. The cash taxes for 2013 and 2012 are primarily for U.S. federal and state income taxes and foreign income taxes in certain foreign jurisdictions. Commencing with certain reorganization activities that we started during the fourth quarter of 2012, we will reassess the long-term profitability of certain of our operations that are currently incurring losses in EMEA. The reassessment may result in releases of valuation allowances that are currently assessed against the net deferred tax assets with these operations, which will affect our effective tax rate favorably at the time when such a benefit is recognized. Net Income from Discontinued Operations. During the three months ended March 31, 2013, we did not have any discontinued operations. For the three months ended March 31, 2012, our net income from discontinued operations was $199,000. For additional information, see "Discontinued Operations" in Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. Adjusted EBITDA. Adjusted EBITDA is a key factor in how we assess the performance of the segment, measure the operational cash generating abilities of the segment and develop regional growth strategies such as IBX data center expansion decisions. Our adjusted EBITDA for the three months ended March 31, 2013 and 2012 were split among the following geographic regions (dollars in thousands): Three months ended March 31, % change Constant 2013 % 2012 % Actual currency Americas $ 146,530 60 % $ 133,198 63 % 10 % 11 % EMEA 49,054 20 % 46,884 22 % 5 % 5 % Asia-Pacific 47,876 20 % 30,514 15 % 57 % 60 % Total $ 243,460 100 % $ 210,596 100 % 16 % 16 % Americas Adjusted EBITDA. The increase in our Americas adjusted EBITDA was primarily due to our improved income from continuing operations, higher add-back depreciation expense due to our IBX data center expansion activity and higher add-back stock-based compensation expense due to both headcount growth (1,872 Americas employees as of March 31, 2013 versus 1,800 as of March 31, 2012) and an increase in the fair value of equity awards granted. EMEA Adjusted EBITDA. The increase in our EMEA adjusted EBITDA was primarily due to the impact of the Dubai IBX data center and ancotel acquisitions, which generated $1.4 million of adjusted EBITDA during the three months ended March 31, 2013. Asia-Pacific Adjusted EBITDA. The increase in our Asia-Pacific adjusted EBITDA was primarily due to our improved income from continuing operations and higher add-back depreciation expense due to the impact of the Asia Tone acquisition and our IBX data center expansion activity. Our Asia-Pacific adjusted EBITDA for the three months ended March 31, 2013, included $6.7 million of adjusted EBITDA from the impact of the Asia Tone acquisition. 41-------------------------------------------------------------------------------- Table of Contents 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 from continuing operations may be difficult if limited to reviewing only GAAP financial measures. Accordingly, we use non-GAAP financial measures, primarily adjusted EBITDA, to evaluate our continuing 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, impairment charges and acquisition costs. Legislative and regulatory requirements encourage the use of and emphasis on GAAP financial metrics and require companies to explain why 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 continuing 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 stock-based compensation expense as it primarily 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 continuing 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. We also exclude impairment charges related to certain long-lived assets. The impairment charges are related to expense recognized whenever events or changes in circumstances indicate that the carrying amount of long-lived assets are not recoverable. Finally, we 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, impairment 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. 42 -------------------------------------------------------------------------------- Table of Contents 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 those 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. We define adjusted EBITDA as income or loss from continuing operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges and acquisition costs as presented below (in thousands): Three months ended March 31, 2013 2012 Income from continuing operations $ 108,564 $ 100,746 Depreciation, amortization and accretion expense 108,531 90,150 Stock-based compensation expense 22,703 19,025 Acquisitions costs 3,662 675 Adjusted EBITDA $ 243,460 $ 210,596 Our adjusted EBITDA results have improved each year and in each region in total dollars due to the improved operating results discussed earlier in "Results of Operations", as well as due to the nature of our business model which consists of a recurring revenue stream and a cost structure which has a large base that is fixed in nature as discussed earlier in "Overview". Although we have also been investing in our future growth as described above (e.g. through additional IBX data center expansions, acquisitions and increased investments in sales and marketing expenses), 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 March 31, 2013, our total indebtedness was comprised of (i) convertible debt principal totaling $769.7 million from 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 $3.8 billion consisting of (a) $3.0 billion of principal from our 8.125%, 7.00%, 5.375% and 4.875% senior notes, (b) $226.9 million of principal from our loans payable and (c) $584.4 million from our capital lease and other financing obligations. In March 2013, we received gross proceeds of $1.5 billion from the senior notes offering. In April 2013, we redeemed the $750.0 million 8.125% senior notes with $830.9 million of cash. We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of the current portion of our debt as it becomes due, payment of tax liabilities related to the decision to convert to a REIT (see below) and completion of our publicly-announced expansion projects. As of March 31, 2013, we had $1.2 billion of cash, cash equivalents and short-term and long-term investments, of which approximately $1.0 billion was held in the U.S. Additionally, as more fully described in Note 9 to Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, as of March 31, 2013, we had an $843.5 million current portion of restricted cash, of which $836.4 million was from the proceeds of the senior notes offering in March 2013 and was used to redeem our 8.125% senior notes in April 2013. We believe that our current expansion activities in the U.S. can be funded with our U.S.-based cash and cash equivalents and investments. Besides our investment portfolio, additional liquidity available to us from the U.S. financing 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. 43 -------------------------------------------------------------------------------- Table of Contents Additionally, approximately 18% of our gross trade receivables are attributable to our EMEA region, and due to the risks posed by the current European debt crisis and credit downgrade, our EMEA-based customers may have difficulty paying us. As a result, our liquidity could be adversely impacted by the possibility of increasing trade receivable aging and higher allowances for doubtful accounts. As of March 31, 2013, we had a total of approximately $528.2 million of additional liquidity available to us under the U.S. financing. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX data center 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, and have also announced our planned conversion to a REIT (see below). While we expect 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, including acquisitions. 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. Impact of REIT Conversion In accordance with tax rules applicable to REIT conversions, we expect to issue special distributions to our stockholders of undistributed accumulated earnings and profits of approximately $700.0 million to $1.1 billion, which is collectively referred to as the E&P distribution, which we expect to pay out in a combination of up to 20% in cash and at least 80% in the form of our common stock. We expect to make the E&P distribution only after receiving a favorable PLR from the IRS and anticipate making a significant portion of the E&P distribution before 2015, with the balance distributed in 2015. In addition, following the completion of the REIT conversion, we intend to declare regular distributions to our stockholders. There are significant tax and other costs associated with implementing the REIT conversion, and certain tax liabilities may be incurred regardless of the whether we ultimately succeed in converting to a REIT. We currently estimate that we will incur approximately $50.0 to $80.0 million in costs to support the REIT conversion, in addition to related tax liabilities associated with a change in our method of depreciating and amortizing various data center assets for tax purposes from our prior method to current methods that are more consistent with the characterization of such assets as real property for REIT purposes. The total recapture of depreciation and amortization expenses across all relevant assets is expected to result in federal and state tax liability of approximately $340.0 to $420.0 million, which amount will be payable in the four-year period starting in 2012 even if we abandon the REIT conversion for any reason, including the failure to receive the PLR we are seeking. We expect to utilize all our net operating loss carryforwards for federal and state income tax purposes in 2013. If the REIT conversion is successful, we also expect to incur an additional $5.0 to $10.0 million in annual compliance costs in future years. Sources and Uses of Cash Three Months Ended March 31, 2013 2012 Net cash provided by operating activities $ 84,181 $ 125,993 Net cash provided by (used in) investing activities (1,142,540 ) 269,433 Net cash provided by (used in) financing activities 1,496,760 (43,950 ) Operating Activities. The decrease in net cash provided by operating activities was primarily due to unfavorable working capital activities such as growth in accounts receivables and increased payments of certain accounts payable and accrued expenses as well as $19.0 million of excess tax benefits from stock-based compensation, partially offset by improved operating results. Although our collections remain strong, it is possible for some large customer receivables that were anticipated to be collected in one 44-------------------------------------------------------------------------------- Table of Contents quarter to slip to the next quarter. For example, some large customer receivables that were anticipated to be collected in March 2013 were instead collected in April 2013, which negatively impacted cash flows from operating activities for the three months ended March 31, 2013. We expect that we will continue to generate cash from our operating activities during the remainder of 2013 and beyond. Investing Activities. The net cash used in investing activities for the three months ended March 31, 2013 was primarily due to the deposit of $836.4 million of proceeds from the senior notes offering in March 2013 into a restricted cash account for the redemption of the 8.125% senior notes, $296.5 million of purchases of investments and $75.7 million of capital expenditures as a result of expansion activity. The net cash provided by investing activities for the three months ended March 31, 2012 was primarily due to $443.7 million of maturities and sales of investments and $68.6 million of release of restricted cash primarily related to payments made in connection with the Paris 4 IBX financing, partially offset by $145.5 million of capital expenditures as a result of expansion activity and $97.4 million of purchases of investments. During 2013, we expect that our IBX expansion construction activity will be similar to our 2012 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 as well as pursue additional acquisitions or joint ventures. Financing Activities. The net cash provided by financing activities for the three months ended March 31, 2013 was primarily due to $1.5 billion of proceeds from the senior notes offering in March 2013 and $14.4 million of proceeds from employee equity awards, partially offset by $19.0 million of debt issuance costs and $17.6 million of repayments of various long-term debt and capital lease and other financing obligations. The net cash used in financing activities for the three months ended March 31, 2012 was primarily due to $10.1 million of repayments of principal on the Asia-Pacific debt facility, $55.4 million repayment of principal on the Paris 4 IBX financing and $13.4 million of purchases of treasury stock, partially offset by $30.5 million of proceeds from employee equity awards and $8.9 million of proceeds from an ALOG debt facility. Going forward, we expect that our financing activities will consist primarily of repayment of our debt for the foreseeable future, including the $750.0 million 8.125% senior notes, which were settled in April 2013. However, we may pursue additional financings in the future to support expansion opportunities, additional acquisitions or joint ventures. Debt Obligations 4.875% Senior Notes and 5.375% Senior Notes. In March 2013, we issued $1.5 billion aggregate principal amount of senior notes, which consist of $500.0 million aggregate principal amount of 4.875% senior notes due April 1, 2020 and $1.0 billion aggregate principal amount of 5.375% senior notes due April 1, 2023. Interest on both the 4.875% senior notes and the 5.375% senior notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 2013. The 4.875% senior notes and the 5.375% senior notes are governed by separate indentures dated March 5, 2013, which is referred to as the senior notes indentures, between us, as issuer, and U.S. Bank National Association, as trustee (the "Senior Notes Indentures"). The senior notes indentures contain covenants that limit our ability and the ability of our subsidiaries to, among other things: • incur additional debt; • pay dividends or make other restricted payments; • purchase, redeem or retire capital stock or subordinated debt; • make asset sales; • enter into transactions with affiliates; • incur liens; • enter into sale-leaseback transactions; • provide subsidiary guarantees; • make investments; and • merge or consolidate with any other person. 45 -------------------------------------------------------------------------------- Table of Contents Each of these restrictions has a number of important qualifications and exceptions. The 4.875% senior notes and the 5.375% senior notes are unsecured and rank equal in right of payment with our existing or future senior debt and senior in right of payment to our existing and future subordinated debt. The 4.875% senior notes and the 5.375% senior notes are effectively junior with our secured indebtedness and indebtedness of our subsidiaries. At any time prior to April 1, 2016, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 4.875% senior notes outstanding at a redemption price equal to 104.875% of the principal amount of the 4.875% senior notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that (i) at least 65% of the aggregate principal amount of the 4.875% senior notes issued under the 4.875% senior notes indenture remains outstanding immediately after the occurrence of such redemption (excluding the 4.875% senior notes held by us and our subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering. On or after April 1, 2017, we may redeem all or a part of the 4.875% senior notes, on any one or more occasions, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below: Redemption price of the 4.875% Senior Notes 2017 102.438 % 2018 101.219 % 2019 and thereafter 100.000 % At any time prior to April 1, 2017, we may also redeem all or a part of the 4.875% senior notes at a redemption price equal to 100% of the principal amount of the 4.875% senior notes redeemed plus an applicable premium, which is referred to as the 4.875% senior notes applicable premium, and accrued and unpaid interest, if any, to, but not including, the date of redemption, which is referred to as the 4.875% senior notes redemption date. The 4.875% senior notes applicable premium means the greater of: • 1.0% of the principal amount of the 4.875% senior notes; and • the excess of: (a) the present value at such redemption date of (i) the redemption price of the 4.875% senior notes at April 1, 2017 as shown in the above table, plus (ii) all required interest payments due on the 4.875% senior notes through April 1, 2017 (excluding accrued but unpaid interest, if any, to, but not including the 4.875% senior notes redemption date), computed using a discount rate equal to the yield to maturity of the U.S. Treasury securities with a constant maturity most nearly equal to the period from the 4.875% senior notes redemption date to April 1, 2017, plus 0.50%; over (b) the principal amount of the 4.875% senior notes. At any time prior to April 1, 2016, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the 5.375% senior notes outstanding at a redemption price equal to 105.375% of the principal amount of the 5.375% senior notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings; provided that (i) at least 65% of the aggregate principal amount of the 5.375% senior notes issued under the 5.375% senior notes indenture remains outstanding immediately after the occurrence of such redemption (excluding the 5.375% senior notes held by us and our subsidiaries); and (ii) the redemption must occur within 90 days of the date of the closing of such equity offering. On or after April 1, 2018, we may redeem all or a part of the 5.375% senior notes, on any one or more occasions, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the twelve-month period beginning on April 1 of the years indicated below: 46 -------------------------------------------------------------------------------- Table of Contents Redemption price of the 5.375% Senior Notes 2018 102.688 % 2019 101.792 % 2020 100.896 % 2021 and thereafter 100.000 % At any time prior to April 1, 2018, we may also redeem all or a part of the 5.375% senior notes at a redemption price equal to 100% of the principal amount of the 5.375% senior notes redeemed plus an applicable premium, which is referred to as the 5.375% senior notes applicable premium, and accrued and unpaid interest, if any, to, but not including, the date of redemption, which is referred to as the 5.375% senior notes redemption date. The 5.375% senior notes applicable premium means the greater of: • 1.0% of the principal amount of the 5.375% senior notes; and • the excess of: (a) the present value at such redemption date of (i) the redemption price of the 5.375% senior notes at April 1, 2018 as shown in the above table, plus (ii) all required interest payments due on the 5.375% senior notes through April 1, 2018 (excluding accrued but unpaid interest, if any, to, but not including the 5.375% senior notes redemption date), computed using a discount rate equal to the yield to maturity of the U.S. Treasury securities with a constant maturity most nearly equal to the period from the 5.375% senior notes redemption date to April 1, 2018, plus 0.50%; over (b) the principal amount of the 5.375% senior notes. Debt issuance costs related to the 4.875% senior notes and 5.375% senior notes, net of amortization, were $20.2 million as of March 31, 2013. In March 2013, we placed $836.4 million of the proceeds from the issuance of the 4.875% and 5.375 senior notes into a restricted cash account for the redemption of the 8.125% senior notes. 8.125% Senior Notes. In February 2010, we issued $750.0 million aggregate principal amount of 8.125% senior notes due March 1, 2018. The indenture governing the 8.125% senior notes permitted us to redeem the 8.125% senior notes at the redemption prices set forth in the 8.125% senior notes indenture plus accrued and unpaid interest to, but not including the redemption date. In April 2013, we redeemed all of the 8.125% senior notes and incurred a loss on debt extinguishment, which will be recorded in the second quarter of 2013. See Note 14 to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q. U.S. Financing. In February 2013, we entered into an amendment to a credit agreement with a group of lenders for a $750.0 million credit facility, referred to as the U.S. financing, which is comprised of a $200.0 million term loan facility, referred to as the U.S. term loan, and a $550.0 million multicurrency revolving credit facility, referred to as the U.S. revolving credit line. The amendment modified certain definitions of items used in the calculation of the financial covenants with which we must comply on a quarterly basis to exclude the write-off of any unamortized debt issuance costs that were incurred in connection with the issuance of the 8.125% senior notes; to exclude one-time transaction costs, fees, premiums and expenses incurred by us in connection with the issuance of the 4.875% senior notes and 5.375% senior notes and the redemption of the 8.125% senior notes; and to exclude the 8.125% senior notes provided that certain conditions in connection with the redemption of the 8.125% senior notes were satisfied. The amendment also postponed the step-down of the maximum senior leverage ratio covenant from the three months ended March 31, 2013 to the three months ended September 30, 2013. 47-------------------------------------------------------------------------------- Table of Contents Contractual Obligations and Off-Balance-Sheet Arrangements We lease a majority of our IBX data 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 March 31, 2013 (in thousands): 2013 (9 months) 2014 2015 2016 2017 Thereafter Total Convertible debt (1) $ - $ 395,986 $ - $ 373,727 $ - $ - $ 769,713 Senior notes (2) 750,000 - - - - 2,250,000 3,000,000 U.S. term loan (3) 30,000 40,000 40,000 40,000 20,000 - 170,000 ALOG financing (3) - 14,162 14,162 14,161 7,081 - 49,566 Other loans payable (3) 36 - - - - - 36 Paris 4 IBX financing (4) 7,308 - - - - - 7,308 Interest (5) 135,407 225,871 214,254 203,166 192,168 597,418 1,568,284 Capital lease and other financing obligations (6) 42,730 62,105 66,467 70,024 70,140 605,030 916,496 Operating leases under accrued restructuring charges (7) 1,857 2,459 1,444 - - - 5,760 Operating leases (8) 86,288 113,464 96,205 84,902 82,129 415,902 878,890 Other contractual commitments (9) 270,560 75,260 32,703 632 577 - 379,732 Asset retirement obligations (10) 50 4,489 7,100 464 6,525 44,802 63,430 ALOG acquisition contingent consideration (11) 19,449 - - - - - 19,449 Redeemable non-controlling interests - 96,891 - - - - 96,891 $ 1,343,685 $ 1,030,687 $ 472,335 $ 787,076 $ 378,620 $ 3,913,152 $ 7,925,555 (1) Represents principal only. As of March 31, 2013, had the holders of the 3.00% convertible subordinated notes due 2014 converted their notes, the 3.00% convertible subordinated notes would have been convertible into approximately 3.6 million shares of our common stock, which would have a total value of $779.5 million based on the closing price of our common stock on March 28, 2013, the last trading day of our common stock during the three months ended March 31, 2013. As of March 31, 2013, had the holders of the 4.75% convertible subordinated notes due 2016 converted their notes, the 4.75% convertible subordinated notes would have been convertible into approximately 4.4 million shares of our common stock, which would have a total value of $958.8 million based on the closing price of our common stock on March 28, 2013, the last trading day of our common stock during the three months ended March 31, 2013. (2) In April 2013, the principal balance of the $750.0 million 8.125% senior notes due March 1, 2018 was redeemed plus approximately $80.9 million of applicable premium paid. (3) Represents principal only. (4) Represents total payments to be made under two agreements to purchase and develop the Paris 4 IBX center. (5) Represents interest on ALOG financing, convertible debt, senior notes, U.S. term loan and other loans payable based on their approximate interest rates as of March 31, 2013. (6) Represents principal and interest. (7) Excludes any subrental income. (8) Represents minimum operating lease payments, excluding potential lease renewals. (9) Represents off-balance sheet arrangements. Other contractual commitments are described below. (10) Represents liability, net of future accretion expense. (11) Represents the ALOG acquisition contingent consideration, subject to reduction for any post-closing balance sheet adjustments and any claims for indemnification, and includes the portion of the contingent consideration that will be funded by Riverwood Capital L.P., who has an indirect, non-controlling equity interest in ALOG. In connection with certain of our leases and other contracts requiring deposits, we entered into 14 irrevocable letters of credit totaling $21.8 million under the senior revolving credit line. These letters of credit were provided in lieu of cash deposits under the senior revolving credit line. 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 senior revolving credit line. These contingent commitments are not reflected in the table above. We had accrued liabilities related to uncertain tax positions totaling approximately $22.8 million as of March 31, 2013. These liabilities, which are reflected on our balance sheet, are not reflected in the table above since it is unclear when these liabilities will be paid. 48-------------------------------------------------------------------------------- Table of Contents Primarily as a result of our various IBX data center expansion projects, as of March 31, 2013, we were contractually committed for $118.8 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 2013 and thereafter, is reflected in the table above as "other contractual commitments." We had other non-capital purchase commitments in place as of March 31, 2013, 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 2013 and beyond. Such other purchase commitments as of March 31, 2013, which total $260.9 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 $220 million to $250 million, in addition to the $118.8 million in contractual commitments discussed above as of March 31, 2013, in our various IBX data center expansion projects during 2013 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. In March 2013, we entered into a lease for land and a building that we and the landlord will jointly develop into our third IBX data center in the Singapore metro area, referred to as the Singapore 3 lease. The Singapore 3 lease has a term of 20 years, with an option to purchase the property. If the option to purchase property is not exercised, we have options to extend the lease. The total cumulative minimum rent obligation over the term of the lease is approximately $160.1 million, exclusive of renewal periods. 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, 2012. 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 ]