October 25, 2005
Equinix Reports Third Quarter 2005 Results
Foster City, CA — October 25, 2005 — Equinix, Inc. (Nasdaq: EQIX), the leading provider of network-neutral data centers and Internet exchange services, today reported its quarterly results for the period ended September 30, 2005.
Revenues were $58.1 million for the third quarter, a 37% increase over the same quarter last year and an 11% increase over the previous quarter. Recurring revenues, consisting of colocation, interconnection and managed services, were $54.3 million, a 36% increase over the same quarter last year and a 10% increase over the previous quarter. Non- recurring revenues were $3.8 million in the quarter, consisting of $2.9 million in professional services and installation fees and customer settlements of $859,000.
Note: Equinix uses non-GAAP financial measures, such as EBITDA, cash cost of revenues, cash gross margins, cash operating expenses (also known as cash selling, general and administrative expenses or cash SG&A), cash interest expense, cash net income (loss), non-GAAP net income (loss), and free cash flow to evaluate its operations. A reconciliation of these non-GAAP financial measures to the most closely applicable GAAP financial measure are attached to this release and commence at the bottom of our condensed consolidated statements of operations — GAAP presentation.
Cost of revenues were $41.0 million for the third quarter, a 19% increase over the same quarter last year and a 6% increase over the previous quarter. Cost of revenues, excluding depreciation, amortization, accretion and stock-based compensation of $15.9 million, were $25.1 million for the third quarter, a 22% increase over the same quarter last year and an 8% increase over the previous quarter. Cash gross margins, defined as gross profit less depreciation, amortization, accretion and stock-based compensation, divided by revenues, for the quarter were 57%, up from 51% the same quarter last year and 56% the previous quarter.
Selling, general and administrative expenses were $16.9 million for the third quarter, a 33% increase over the same quarter last year and a 5% increase over the previous quarter. Selling, general and administrative expenses, excluding depreciation, amortization and stock-based compensation of $1.8 million, were $15.1 million for the third quarter, a 29% increase over same quarter last year and a 15% increase over the previous quarter.
Net loss for the third quarter, including stock-based compensation expense of $1.4 million, was $783,000. This represents a basic and diluted net loss per share of $0.03 based on a weighted average share count of 24.1 million. Excluding stock-based compensation, the Company, for the first time, was net income positive for the quarter, with a non-GAAP net income of $575,000, a $7.0 million improvement over the same quarter last year and $1.5 million improvement over the previous quarter. The Company's cash net income, defined as net income (loss) less depreciation, amortization, accretion, stock-based compensation expense, restructuring charges and non-cash interest expense for the quarter was $17.2 million, a 12% improvement over the previous quarter.
EBITDA, defined as income or loss from operations before depreciation, amortization, accretion, stock-based compensation expense and restructuring charges, for the third quarter was $17.9 million, up 12% over the previous quarter and up from $10.1 million the same quarter 2004.
Capital expenditures in the quarter were $7.1 million, of which $5.0 million was attributed to ongoing capital expenditures and $2.1 million was attributed to expansion capital expenditures. In addition, the Company used $34.7 million of its cash to acquire its new Los Angeles IBX center in September 2005.
The Company generated cash from operating activities of $15.5 million as compared to $18.1 million in the previous quarter. Cash used in investing activities was $42.1 million as compared to $6.7 million in the previous quarter, primarily attributed to the $34.7 million acquisition of the new Los Angeles area IBX center. Free cash flow was negative $26.6 million, including the investment in the new Los Angeles area IBX center. Free cash flow is defined as net cash generated from operating activities less net cash used in investing activities (excluding the purchases, sales and maturities of short-term and long-term investments). Excluding the investment in the new Los Angeles area IBX center, free cash flow was $8.1 million.
As of September 30, 2005, the Company's cash, cash equivalents and investments were $108.3 million, as compared to $132.0 million in the previous quarter.
"Our market position, customer momentum, and brand have never been stronger," said Peter Van Camp, CEO of Equinix. "With the continued solid demand for our services and recent data center acquisitions to support the demand, we believe we are well-positioned for 2006."
Other Company Developments & Metrics
� In September 2005, Equinix purchased a 107,000 square foot stand- alone data center located in El Segundo, in the Los Angeles area, for $34.7 million, including closing costs. The Company has now entered into a purchase and sale agreement dated October 24, 2005, to sell this data center for $38.7 million and to lease it back from the purchaser pursuant to a long-term lease. Equinix will realize approximately $15.0 million in cash savings over the initial term of the lease as opposed to having entered into a direct lease with the previous owner. These savings include a cash benefit on the sale of the center approximating $3.5 million, net of costs. The sale- leaseback transaction is subject to certain closing contingencies. Although there can be no assurance that these contingencies will be met, it is expected that these conditions will be removed on or before November 1, 2005 and the transaction will close before the end of the year.
� Equinix announced today that it has negotiated a non-binding letter of intent to finance the recently-acquired Washington, D.C. area center campus with a $60.0 million, 8% mortgage to be amortized over 20 years. The Company also announced today that it has entered into a non-binding letter of intent for the early termination of its 39 acre San Jose ground lease whereby Equinix will pay $40.0 million over the next four years, or an incremental amount of approximately $4.0 million per year over the current lease obligations, completely eliminating the $6.0 to $7.0 million annual lease payments in years 2010 through 2020. The early termination payments commence January 1, 2006. As a result of this transaction, Equinix expects to incur a restructuring charge in the range of $35.0 to $40.0 million in the fourth quarter of 2005. These transactions are subject to the completion of definitive agreements, and although there is no assurance that the definitive agreements will be completed, the Company currently expects the transaction to close before the end of the year.
� In October, Equinix filed a shelf registration statement with the Securities and Exchange Commission in order to register approximately 10.2 million shares of the Company's common stock on behalf of STT Communications Ltd. At the time any securities are offered for sale, one or more prospectus supplements will be provided containing specific information about the terms of any such offering.
� On a same IBX basis (defined as IBX centers which have been available for new customer installs for at least four full quarters), revenues were $54.8 million; cost of revenues were $37.3 million; cost of revenues, excluding depreciation, amortization, accretion and stock-based compensation, were $23.3 million and cash gross margins for the quarter were 57%. EBITDA on a same IBX basis was $16.9 million. Included in the same IBX results were certain selling, general and administrative expenses such as the costs related to our recent S-3 registration statement filing and related costs and severance charges.
� Equinix added 74 new customers in the quarter including BT Japan Corporation, Citic Capital Markets Holdings Limited, L'Oreal USA, NJ State Library, NTT Singapore Pte Ltd, Petfinder.com, Raindance Communications, Time Warner Entertainment and Vonage Australia Pty Ltd. Over 50 percent of Equinix's new bookings in the quarter came from existing customers including The Gap, Salesforce.com, Sony Corporation of America, XM Satellite Radio and Yahoo!.
� Based on a total cabinet capacity of approximately 26,200, the number of cabinets billing at the end of the quarter was approximately 13,700, or 52%, up from approximately 12,400 the previous quarter. On a weighted average basis, the number of cabinets billing was approximately 13,300, which represents 51%.
� U.S. interconnection service revenues were 21% of U.S. recurring revenues for the quarter. Interconnection services represent greater than 19% of total worldwide recurring revenues. Equinix signed additional customers on its new 10 Gigabit Ethernet service including Cox Communications, Free and nLayer Communications.
For the full year of 2005, revenues are expected to be in the range of $219.3 to $220.3 million, an increase from previously provided guidance of $216.0 to $219.0 million. Total year cash gross margins will range between 56% and 57%. Cash selling, general and administrative expenses are expected to be approximately $55.0 million, an increase from our previously provided guidance of $53.0 million. EBITDA for the year is expected to be between $69.0 and $70.0 million, an increase from its previous guidance of $66.0 to $68.0 million. Net loss is expected to range between $48.0 and $50.0 million including the restructuring charge attributable to the pending San Jose ground lease transaction, approximately $8.5 million of stock-based compensation expense primarily attributed to the restricted stock grants and $9.0 million of interest expense. The weighted average shares outstanding will be approximately 23.5 million. Capital expenditures for 2005, excluding purchases and sales of real estate assets, are expected to be approximately $46.0 to $48.0 million, comprised of $21.0 to $22.0 million of ongoing capital expenditures and $25.0 to $26.0 million of expansion capital expenditures. Free cash flow loss, defined as net cash generated from operating activities less net cash used in investing activities (excluding the purchases, sales and maturities of short-term and long-term investments), is expected to be $18.0 to $19.0 million for the year, which includes the recent purchase of the Washington, D.C. area Ashburn campus. Excluding the purchases and sales of real estate, comprised of the Company's recent Los Angeles and Washington, D.C. area property acquisitions, free cash flow is expected to be greater than $32.0 million, an increase from our previous guidance of greater than $30.0 million.
For 2006, total revenues are expected to be in the range of $275.0 to $285.0 million. Cash gross margins are expected to be in the range of 57% to 59%, including the full year impact of approximately $5.7 million of additional cost of revenues from three new IBX centers expected to open in the first half of 2006. Cash selling, general and administrative expenses are expected to be in the range of $60.0 to $64.0 million, including approximately $3.6 million of investments in expansion efforts. EBITDA for the year is expected to be between $95.0 and $105.0 million, including the benefit realized from the restructuring charge attributable to the pending San Jose ground lease transaction, of approximately $6.0 million. Capital expenditures for 2006 are expected to be in a range of $55.0 to $60.0 million, comprised of approximately $20.0 million of ongoing capital expenditures and $35.0 to $40.0 million of expansion capital expenditures for the build out of the Silicon Valley, Chicago and Los Angeles expansions. Free cash flow is expected to be greater than $40.0 million.
The Company will discuss its results and guidance on its quarterly conference call on Tuesday, October 25, 2005, at 4:30 p.m. ET (1:30 p.m. PT). To hear the conference call, please dial 1-773-799-3263 (domestic and international) and reference the passcode (EQIX). A simultaneous live Webcast of the call will be available over the Internet at www.equinix.com, under the Investor Relations heading. A replay of the call will be available beginning on Tuesday, October 25, 2005 at 6:30 p.m. (ET) by dialing 203- 369-3605. In addition, the Webcast will be available for replay on the Company's Web site at www.equinix.com. No password is required for either method of replay. A reconciliation between GAAP information and non-GAAP information contained in this press release is provided in a table immediately following the Condensed Consolidated Statements of Operations - GAAP Presentation. This reconciliation is also available at www.equinix.com under the Investor Relations heading.
Non-GAAP Financial Measures
Equinix continues to provide all information required in accordance with generally accepted accounting principles (GAAP), but it believes that evaluating its ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, Equinix uses non- GAAP financial measures, such as EBITDA, cash cost of revenues, cash gross margins, cash operating expenses (also known as cash selling, general and administrative expenses or cash SG&A), cash interest expense, cash net income (loss), non-GAAP net income (loss), and free cash flow to evaluate its operations. In presenting these non-GAAP financial measures, Equinix excludes certain non-cash or non-recurring items that it believes are not good indicators of the Company's current or future operating performance. These non-cash or non-recurring items are depreciation, amortization, accretion, stock-based compensation, non-cash interest, and, with respect to 2004 results, the non-cash portion of loss on debt extinguishment and conversion and restructuring charges (there were no such charges or losses in 2005). Recent legislative and regulatory changes encourage use of and emphasis on GAAP financial metrics and require companies to explain why non-GAAP financial metrics are relevant to management and investors. Equinix excludes these non-cash or non- recurring items in order for Equinix's lenders, investors, and industry analysts who review and report on the Company, to better evaluate the Company's operating performance and cash spending levels relative to its industry sector and competitor base.
Equinix excludes depreciation expense as these charges primarily relate to the initial construction costs of our IBX centers and do not reflect our current or future cash spending levels to support our business. Our IBX centers are long-lived assets, and have an economic life greater than ten years. The construction costs of our IBX 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 centers. These estimates could vary from actual performance of the asset, are based on historic costs incurred to build out our IBX centers, and are not indicative of current or expected future capital expenditures. Therefore, Equinix excludes depreciation from its operating results when evaluating its operations.
In addition, in presenting the non-GAAP financial measures, Equinix excludes amortization expense related to certain intangible assets, as it represents a non-cash cost that may not recur and is not a good indicator of the Company's current or future operating performance. Equinix excludes accretion expense, both as it relates to its asset retirement obligations as well as its accrued restructuring charge liability, as these expenses represent costs, which Equinix believes are not meaningful in evaluating the Company's current operations. Equinix excludes non-cash stock-based compensation expense as it represents expense attributed to stock awards that have no current or future cash obligations. As such, we, and our investors and analysts, exclude this stock-based compensation expense when assessing the cash generating performance of our operations. Equinix excludes interest expense associated with the amortization of debt issuance costs and discounts, as well as the interest expense associated with its convertible secured notes as such interest expenses do not require any cash in the periods presented nor will they in future periods. Lastly, with respect to its 2004 results, Equinix excludes restructuring charges and the non-cash portion of the loss on debt extinguishment and conversion. The restructuring charges relate to the Company's decision to exit leases for excess space adjacent to several of our IBX centers, which we do not intend to build out now or in the future. The non-cash portion of the loss on debt extinguishment and conversion, which represents the write-off of the unamortized debt issuance costs and discounts associated with the debt facilities extinguished or converted as no cash was expended in the periods presented for such write-offs nor will there be in the future. Management believes such restructuring charges and write-offs of debt issuance costs and discounts were unique costs that are not expected to recur, and consequently, does not consider these charges as a normal component of expenses related to current and ongoing operations.
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 ongoing business operations. Management believes that the inclusion of these non- GAAP financial measures provide consistency and comparability with past reports and provide a better understanding of the overall performance of the business and its ability to perform in subsequent periods. Equinix believes that if it 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 Equinix 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 Equinix uses such non-GAAP financial measures, it provides a reconciliation of non-GAAP financial measures 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.
Equinix does not provide forward-looking guidance for certain financial data, such as depreciation, amortization, accretion, stock-based compensation (with respect to 2006), net income (loss) from operations, interest income, cash generated from operating activities and cash used in investing activities, and as a result, is not able to provide a reconciliation of GAAP to non-GAAP financial measures for forward-looking data. Equinix intends to calculate the various non-GAAP financial measures in future periods consistent with how it was calculated for the three and nine months ended September 30, 2005 and 2004, presented within this press release.
Forward Looking Statements
This press release contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from expectations discussed in such forward-looking statements. Factors that might cause such differences include, but are not limited to, the challenges of acquiring, operating and constructing IBX centers and developing, deploying and delivering Equinix services; unanticipated costs or difficulties relating to the integration of IXEurope into Equinix; a failure to receive significant revenue from customers in recently built out data centers; failure to complete any financing arrangements contemplated from time to time; competition from existing and new competitors; the ability to generate sufficient cash flow or otherwise obtain funds to repay new or outstanding indebtedness; the loss or decline in business from our key customers; the results of any litigation relating to past stock option grants and practices; and other risks described from time to time in Equinix's filings with the Securities and Exchange Commission. In particular, see Equinix's recent quarterly and annual reports filed with the Securities and Exchange Commission, copies of which are available upon request from Equinix. Equinix does not assume any obligation to update the forward-looking information contained in this press release.
Equinix and IBX are registered trademarks of Equinix, Inc. Internet Business Exchange is a trademark of Equinix, Inc.