Item 1. Condensed Consolidated Financial Statements
EQUINIX, INC.
Condensed Consolidated Balance Sheets
(in thousands)
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
|
(Unaudited)
|
Assets
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
483,160
|
|
|
$
|
2,228,838
|
|
Short-term investments
|
3,328
|
|
|
12,875
|
|
Accounts receivable, net
|
346,994
|
|
|
291,964
|
|
Current portion of restricted cash
|
3,411
|
|
|
479,417
|
|
Other current assets
|
233,870
|
|
|
212,929
|
|
Assets held for sale
|
1,024,666
|
|
|
33,257
|
|
Total current assets
|
2,095,429
|
|
|
3,259,280
|
|
Long-term investments
|
7,694
|
|
|
4,584
|
|
Property, plant and equipment, net
|
6,958,794
|
|
|
5,606,436
|
|
Goodwill
|
3,190,197
|
|
|
1,063,200
|
|
Intangible assets, net
|
788,955
|
|
|
224,565
|
|
Other assets
|
227,976
|
|
|
198,630
|
|
Total assets
|
$
|
13,269,045
|
|
|
$
|
10,356,695
|
|
Liabilities and Stockholders’ Equity
|
Current liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
498,212
|
|
|
$
|
400,948
|
|
Accrued property, plant and equipment
|
163,388
|
|
|
103,107
|
|
Current portion of capital lease and other financing obligations
|
92,611
|
|
|
40,121
|
|
Current portion of mortgage and loans payable
|
511,331
|
|
|
770,236
|
|
Convertible debt
|
—
|
|
|
146,121
|
|
Other current liabilities
|
142,113
|
|
|
192,286
|
|
Liabilities held for sale
|
152,124
|
|
|
3,535
|
|
Total current liabilities
|
1,559,779
|
|
|
1,656,354
|
|
Capital lease and other financing obligations, less current portion
|
1,514,804
|
|
|
1,287,139
|
|
Mortgage and loans payable, less current portion
|
1,074,663
|
|
|
472,769
|
|
Senior notes
|
3,807,816
|
|
|
3,804,634
|
|
Other liabilities
|
606,518
|
|
|
390,413
|
|
Total liabilities
|
8,563,580
|
|
|
7,611,309
|
|
Commitments and contingencies (Note 10)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common stock
|
71
|
|
|
62
|
|
Additional paid-in capital
|
7,307,575
|
|
|
4,838,444
|
|
Treasury stock
|
(148,246
|
)
|
|
(7,373
|
)
|
Accumulated dividends
|
(1,715,533
|
)
|
|
(1,468,472
|
)
|
Accumulated other comprehensive loss
|
(643,786
|
)
|
|
(509,059
|
)
|
Accumulated deficit
|
(94,616
|
)
|
|
(108,216
|
)
|
Total stockholders’ equity
|
4,705,465
|
|
|
2,745,386
|
|
Total liabilities and stockholders’ equity
|
$
|
13,269,045
|
|
|
$
|
10,356,695
|
|
See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Unaudited)
|
Revenues
|
$
|
900,510
|
|
|
$
|
665,582
|
|
|
$
|
1,744,666
|
|
|
$
|
1,308,756
|
|
Costs and operating expenses:
|
|
|
|
|
|
|
|
Cost of revenues
|
456,967
|
|
|
315,757
|
|
|
884,647
|
|
|
614,070
|
|
Sales and marketing
|
107,832
|
|
|
81,248
|
|
|
214,422
|
|
|
159,864
|
|
General and administrative
|
168,462
|
|
|
119,578
|
|
|
334,366
|
|
|
233,218
|
|
Acquisition costs
|
15,594
|
|
|
9,866
|
|
|
52,130
|
|
|
11,022
|
|
Gains on asset sales
|
—
|
|
|
—
|
|
|
(5,242
|
)
|
|
—
|
|
Total costs and operating expenses
|
748,855
|
|
|
526,449
|
|
|
1,480,323
|
|
|
1,018,174
|
|
Income from continuing operations
|
151,655
|
|
|
139,133
|
|
|
264,343
|
|
|
290,582
|
|
Interest income
|
841
|
|
|
921
|
|
|
1,766
|
|
|
1,441
|
|
Interest expense
|
(100,332
|
)
|
|
(74,496
|
)
|
|
(201,195
|
)
|
|
(143,287
|
)
|
Other income (expense)
|
1,555
|
|
|
1,386
|
|
|
(59,155
|
)
|
|
872
|
|
Loss on debt extinguishment
|
(605
|
)
|
|
—
|
|
|
(605
|
)
|
|
—
|
|
Income from continuing operations before income taxes
|
53,114
|
|
|
66,944
|
|
|
5,154
|
|
|
149,608
|
|
Income tax expense
|
(13,812
|
)
|
|
(7,485
|
)
|
|
(3,179
|
)
|
|
(13,697
|
)
|
Net income from continuing operations
|
39,302
|
|
|
59,459
|
|
|
1,975
|
|
|
135,911
|
|
Net income from discontinued operations, net of tax
|
5,409
|
|
|
—
|
|
|
11,625
|
|
|
—
|
|
Net income
|
$
|
44,711
|
|
|
$
|
59,459
|
|
|
$
|
13,600
|
|
|
$
|
135,911
|
|
Earnings per share (“EPS”):
|
|
|
|
|
|
|
|
Basic EPS from continuing operations
|
$
|
0.56
|
|
|
$
|
1.04
|
|
|
$
|
0.03
|
|
|
$
|
2.39
|
|
Basic EPS from discontinued operations
|
0.08
|
|
|
—
|
|
|
0.17
|
|
|
—
|
|
Basic EPS
|
$
|
0.64
|
|
|
$
|
1.04
|
|
|
$
|
0.20
|
|
|
$
|
2.39
|
|
Weighted-average shares
|
69,729
|
|
|
56,935
|
|
|
68,931
|
|
|
56,798
|
|
Diluted EPS from continuing operations
|
$
|
0.56
|
|
|
$
|
1.03
|
|
|
$
|
0.03
|
|
|
$
|
2.37
|
|
Diluted EPS from discontinued operations
|
0.08
|
|
|
—
|
|
|
0.17
|
|
|
—
|
|
Diluted EPS
|
$
|
0.64
|
|
|
$
|
1.03
|
|
|
$
|
0.20
|
|
|
$
|
2.37
|
|
Weighted-average shares for diluted EPS
|
70,364
|
|
|
57,499
|
|
|
69,575
|
|
|
57,410
|
|
See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Unaudited)
|
Net income
|
$
|
44,711
|
|
|
$
|
59,459
|
|
|
$
|
13,600
|
|
|
$
|
135,911
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Foreign currency translation adjustment (“CTA”) gain (loss)
|
(298,361
|
)
|
|
69,443
|
|
|
(182,462
|
)
|
|
(76,869
|
)
|
Unrealized gain on available-for-sale securities
|
1,199
|
|
|
17
|
|
|
895
|
|
|
120
|
|
Unrealized gain (loss) on cash flow hedges
|
14,726
|
|
|
(14,290
|
)
|
|
7,942
|
|
|
(3,734
|
)
|
Net investment hedge CTA gain (loss)
|
55,196
|
|
|
(10,389
|
)
|
|
38,884
|
|
|
(10,389
|
)
|
Net actuarial gain on defined benefit plans
|
8
|
|
|
83
|
|
|
14
|
|
|
142
|
|
Total other comprehensive income (loss), net of tax
|
(227,232
|
)
|
|
44,864
|
|
|
(134,727
|
)
|
|
(90,730
|
)
|
Comprehensive income (loss), net of tax
|
$
|
(182,521
|
)
|
|
$
|
104,323
|
|
|
$
|
(121,127
|
)
|
|
$
|
45,181
|
|
See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
|
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
(Unaudited)
|
Cash flows from operating activities:
|
|
|
|
Net income
|
$
|
13,600
|
|
|
$
|
135,911
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
Depreciation
|
352,130
|
|
|
236,267
|
|
Stock-based compensation
|
73,384
|
|
|
64,606
|
|
Amortization of intangible assets
|
60,455
|
|
|
12,745
|
|
Amortization of debt issuance costs and debt discounts
|
11,025
|
|
|
7,585
|
|
Provision for allowance for doubtful accounts
|
3,648
|
|
|
2,890
|
|
Gains on asset sales
|
(5,242
|
)
|
|
—
|
|
Loss on debt extinguishment
|
318
|
|
|
—
|
|
Other items
|
11,821
|
|
|
8,006
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts receivable
|
(42,367
|
)
|
|
(41,782
|
)
|
Income taxes, net
|
(23,755
|
)
|
|
(66,147
|
)
|
Accounts payable and accrued expenses
|
(10,625
|
)
|
|
49,293
|
|
Other assets and liabilities
|
(61,294
|
)
|
|
35,900
|
|
Net cash provided by operating activities
|
383,098
|
|
|
445,274
|
|
Cash flows from investing activities:
|
|
|
|
Purchases of investments
|
(16,482
|
)
|
|
(324,292
|
)
|
Sales of investments
|
28,665
|
|
|
718,121
|
|
Maturities of investments
|
—
|
|
|
35,431
|
|
Business acquisitions, net of cash acquired
|
(1,601,627
|
)
|
|
(10,247
|
)
|
Purchases of real estate
|
(28,118
|
)
|
|
(38,282
|
)
|
Purchases of other property, plant and equipment
|
(447,567
|
)
|
|
(371,462
|
)
|
Proceeds from sale of assets
|
22,825
|
|
|
—
|
|
Changes in restricted cash
|
466,587
|
|
|
(507,645
|
)
|
Net cash used in investing activities
|
(1,575,717
|
)
|
|
(498,376
|
)
|
Cash flows from financing activities:
|
|
|
|
Proceeds from employee equity awards
|
17,639
|
|
|
16,565
|
|
Payment of dividends
|
(246,694
|
)
|
|
(192,968
|
)
|
Proceeds from loans payable
|
701,250
|
|
|
490,000
|
|
Repayment of capital lease and other financing obligations
|
(45,335
|
)
|
|
(13,638
|
)
|
Repayment of mortgage and loans payable
|
(973,111
|
)
|
|
(518,629
|
)
|
Other financing activities
|
(42
|
)
|
|
314
|
|
Net cash used in financing activities
|
(546,293
|
)
|
|
(218,356
|
)
|
Effect of foreign currency exchange rates on cash and cash equivalents
|
18,345
|
|
|
(3,326
|
)
|
Change in cash balances included in assets held for sale
|
(25,111
|
)
|
|
—
|
|
Net decrease in cash and cash equivalents
|
(1,745,678
|
)
|
|
(274,784
|
)
|
Cash and cash equivalents at beginning of period
|
2,228,838
|
|
|
610,917
|
|
Cash and cash equivalents at end of period
|
$
|
483,160
|
|
|
$
|
336,133
|
|
See accompanying notes to condensed consolidated financial statements
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Basis of Presentation and Significant Accounting Policies
|
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Equinix, Inc. (“Equinix” or the “Company”) and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the financial position and the results of operations for the interim periods presented. The condensed consolidated balance sheet data as of December 31, 2015 has been derived from audited consolidated financial statements as of that date. The consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”). For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinix’s Form 10-K as filed with the SEC on February 26, 2016. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.
Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Equinix and its subsidiaries, including the acquisitions of Telecity Group plc (“TelecityGroup”) from January 15, 2016, Bit-isle Inc. (“Bit-isle”) from November 2, 2015 and Nimbo Technologies Inc. (“Nimbo”) from January 14, 2015. All significant intercompany accounts and transactions have been eliminated in consolidation.
Income Taxes
The Company began operating as a real estate investment trust for federal income tax purposes ("REIT") effective January 1, 2015. In May 2015, the Company received a favorable response to a private letter ruling (“PLR”) it had requested from the U.S. Internal Revenue Service (“IRS”) in connection with the Company’s conversion to a REIT for federal income tax purposes. As a result, the Company may deduct the distributions made to its shareholders from taxable income generated by the Company and its qualified REIT subsidiaries (“QRSs”). The Company’s dividends paid deduction generally eliminates the taxable income of the Company and its QRSs, resulting in no U.S. income tax due. However, the Company's taxable REIT subsidiaries (“TRSs”) will continue to be subject to income taxes on any taxable income generated by them. In addition, the foreign operations of the Company will continue to be subject to local income taxes regardless of whether the foreign operations are operated as a QRS or a TRS.
The Company provides for income taxes during interim periods based on the estimated effective tax rate for the year. The effective tax rate is subject to change in the future due to various factors such as the operating performance of the Company, tax law changes and future business acquisitions.
The Company’s effective tax rates were
61.7%
and
9.2%
for the six months ended June 30, 2016 and 2015, respectively. The increase in the effective tax rate for the six months in 2016 as compared to the same period in 2015 is primarily due to a much lower profit before tax for the period, attributable to the non-tax deductible costs related to the TelecityGroup acquisition and an increase in valuation allowance.
Assets Held for Sale and Discontinued Operations
Assets and liabilities to be disposed of that meet all of the criteria to be classified as held for sale as set forth in the accounting standard for impairment or disposal of long-lived assets are reported at the lower of their carrying amounts or fair values less costs to sell. Assets are not depreciated or amortized while they are classified as held for sale. A component of a reporting entity or a group of components of a reporting entity that are disposed or meet the criteria to be classified as held for sale should be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The accounting guidance requires a business activity that, on acquisition, meets the criteria to be classified as held for sale be reported as a discontinued operation. For further information on the Company’s assets held for sale and discontinued operations, see Notes 4 and 5.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Recent Accounting Pronouncements
Accounting Standards Not Yet Adopted
In June 2016, Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). This ASU simplifies several areas of the accounting for share-based payment award transactions, including (
a
) income tax consequences; (
b
) classification of awards as either equity or liabilities; and (
c
) classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815), Contingent Put and Call Options in Debt Instruments ("ASU 2016-06"). This ASU clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this ASU is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance should be applied on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year in which the amendments are effective, and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815), Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships ("ASU 2016-05"). This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This ASU may be applied prospectively or using a modified retrospective approach, and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The new lease guidance simplified the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. ASU 2016-02 is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. While the Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, the Company believes this standard will have a significant impact on its consolidated financial statements due, in part, to the substantial amount of operating leases it has.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
In January 2016, the FASB issued ASU 2016-01, Financial Instruments- Overall (Subtopic 825-10) ("ASU 2016-01"), which requires all equity investments to be measured at fair value with changes in the fair value recognized through net income other than those accounted for under equity method of accounting or those that result in consolidation of the investees. The ASU also requires that an entity present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the ASU eliminates the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. ASU 2016-01 is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) Topic 606 and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016 and May 2016 within ASU 2015-04, ASU 2016-08, ASU 2016-10 and ASU 2016-12, respectively (ASU 2014-09, ASU 2015-04, ASU 2016-08, ASU 2016-10, ASU 2016-11 and ASU 2016-12 collectively, Topic 606). Topic 606 will replace most existing revenue recognition guidance in U.S. GAAP. The core principle of Topic 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. Topic 606 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. Topic 606, as amended, is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year entity). Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
Accounting Standards Adopted
In September 2015, the FASB issued ASU 2015-16, Business Combinations ("ASU 2015-16"), to simplify accounting for adjustments made to provisional amounts recognized in a business combination by eliminating the requirement to retrospectively account for those adjustments. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization or other income effects as a result of changes to provisional amounts, calculated as if the accounting had been completed at the acquisition date. The Company adopted ASU 2015-16 in the three months ended March 31, 2016. The adoption of ASU 2015-16 did not have a significant impact on the Company's consolidated financial statements.
In May 2015, the FASB issued ASU 2015-07, Fair Value Measurement (“ASU 2015-07”), which permits a reporting entity, as a practical expedient, to measure the fair value of certain investments using the net asset value per share of the investment. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years with early adoption permitted. A reporting entity should apply the amendment retrospectively to all periods presented. The retrospective approach requires that an investment for which fair value is measured using the net asset value per share practical expedient be removed from the fair value hierarchy in all periods presented in an entity’s financial statements. The Company adopted ASU 2015-07 in the three months ended March 31, 2016. The adoption of ASU 2015-07 did not have a significant impact on the Company's consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Consolidations (“ASU 2015-02”). This ASU requires companies to adopt a new consolidation model, specifically: (1) the ASU modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; (2) the ASU eliminates the presumption that a general partner should consolidate a limited partnership; (3) the ASU affects the consolidation analysis of reporting entities involved with VIEs and (4) the ASU provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. This ASU is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. The Company adopted ASU 2015-02 in the three months ended March 31, 2016. The adoption of ASU 2015-02 did not have a significant impact on the Company's consolidated financial statements.
In January 2015, the FASB issued ASU 2015-01, Income Statement – Extraordinary and Unusual Items (“ASU 2015-01”), to simplify the income statement presentation requirements by eliminating the concept of extraordinary items. ASU 2015-01 is
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company adopted ASU 2015-01 in the three months ended March 31, 2016. The adoption of ASU 2015-01 did not have a significant impact on the Company's consolidated financial statements.
2.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) for the periods presented (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income:
|
|
|
|
|
|
|
|
Net income from continuing operations
|
$
|
39,302
|
|
|
$
|
59,459
|
|
|
$
|
1,975
|
|
|
$
|
135,911
|
|
Net income from discontinued operations
|
5,409
|
|
|
—
|
|
|
11,625
|
|
|
—
|
|
Net income
|
$
|
44,711
|
|
|
$
|
59,459
|
|
|
$
|
13,600
|
|
|
$
|
135,911
|
|
|
|
|
|
|
|
|
|
Weighted-average shares used to calculate basic EPS
|
69,729
|
|
|
56,935
|
|
|
68,931
|
|
|
56,798
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Employee equity awards
|
635
|
|
|
564
|
|
|
644
|
|
|
612
|
|
Weighted-average shares used to calculate diluted EPS
|
70,364
|
|
|
57,499
|
|
|
69,575
|
|
|
57,410
|
|
Basic EPS:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.56
|
|
|
$
|
1.04
|
|
|
$
|
0.03
|
|
|
$
|
2.39
|
|
Discontinued operations
|
0.08
|
|
|
—
|
|
|
0.17
|
|
|
—
|
|
Basic EPS
|
$
|
0.64
|
|
|
$
|
1.04
|
|
|
$
|
0.20
|
|
|
$
|
2.39
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
0.56
|
|
|
$
|
1.03
|
|
|
$
|
0.03
|
|
|
$
|
2.37
|
|
Discontinued operations
|
0.08
|
|
|
—
|
|
|
0.17
|
|
|
—
|
|
Diluted EPS
|
$
|
0.64
|
|
|
$
|
1.03
|
|
|
$
|
0.20
|
|
|
$
|
2.37
|
|
The following table sets forth weighted-average outstanding potential shares of common stock that are not included in the diluted earnings per share calculation above because to do so would be anti-dilutive for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Shares reserved for conversion of 4.75% convertible subordinated notes
|
1,627
|
|
|
1,958
|
|
|
1,795
|
|
|
1,950
|
|
Common stock related to employee equity awards
|
7
|
|
|
99
|
|
|
3
|
|
|
95
|
|
|
1,634
|
|
|
2,057
|
|
|
1,798
|
|
|
2,045
|
|
TelecityGroup Acquisition
On January 15, 2016, the Company completed the acquisition of the entire issued and to be issued share capital of TelecityGroup. TelecityGroup operates data center facilities in cities across Europe. The acquisition of TelecityGroup enhances the Company's existing data center portfolio by adding new IBX metro markets in Europe including Dublin, Helsinki, Istanbul,
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Manchester, Milan, Sofia, Stockholm and Warsaw. As a result of the transaction, TelecityGroup has become a wholly-owned subsidiary of Equinix.
Under the terms of the acquisition, the Company acquired all outstanding shares of TelecityGroup and all vested equity awards of TelecityGroup at
572.5
pence in cash and
0.0336
new shares of Equinix common stock for a total purchase consideration of approximately
£2,624,500,000
or approximately
$3,743,587,000
. In addition, the Company assumed
$1,299,000
of vested TelecityGroup's employee equity awards as part of consideration transferred. The Company incurred acquisition costs of approximately
$14,370,000
and
$50,555,000
during the three and six months ended June 30, 2016 related to the TelecityGroup acquisition.
In connection with the TelecityGroup acquisition, the Company placed
£322,851,000
or approximately
$475,689,000
into a restricted cash account, which was included in the current portion of restricted cash in the condensed consolidated balance sheet as of December 31, 2015. The cash was released upon completion of the acquisition.
Also, in connection with TelecityGroup acquisition, the Company entered into a bridge credit agreement with J.P. Morgan Chase Bank, N.A. (“JPMCB”) as the initial lender and as administrative agent for the lenders for a principal amount of
£875,000,000
or approximately
$1,289,000,000
at the exchange rate in effect on December 31, 2015 (the “Bridge Loan”). The Company did not make any borrowings under the Bridge Loan and the Bridge Loan was terminated on January 8, 2016.
The Company has initially designated the legal entities acquired in the TelecityGroup acquisition as TRSs.
Purchase Price Allocation
Under the acquisition method of accounting, the assets acquired and liabilities assumed in a business combination shall be measured at fair value at the date of the acquisition. As of the date of this quarterly report, the Company has not completed the detailed valuation analysis to derive the fair value of the following items including, but not limited to, intangible assets, accounting for lease contracts; asset retirement obligations; favorable leasehold interests; assets and liabilities held for sale, deferred revenue; property, plant and equipment; accruals and taxes. Therefore, the allocation of the purchase price to acquired assets and liabilities is based on provisional estimates and is subject to continuing management analysis, with assistance of third party valuation advisers. As of the acquisition date, the preliminary allocation of the purchase price is as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
73,368
|
|
Accounts receivable
|
24,042
|
|
Other current assets
|
34,583
|
|
Assets held for sale
|
892,169
|
|
Property, plant and equipment
|
1,055,667
|
|
Goodwill
|
2,264,789
|
|
Intangible assets
|
657,485
|
|
Deferred tax assets
|
1,198
|
|
Other assets
|
4,123
|
|
Total assets acquired
|
5,007,424
|
|
Accounts payable and accrued expenses
|
(90,589
|
)
|
Accrued property, plant and equipment
|
(3,634
|
)
|
Other current liabilities
|
(27,259
|
)
|
Liabilities held for sale
|
(156,169
|
)
|
Capital lease and other financing obligations
|
(199,809
|
)
|
Mortgage and loans payable
|
(592,304
|
)
|
Deferred tax liabilities
|
(159,701
|
)
|
Other liabilities
|
(33,073
|
)
|
Net assets acquired
|
$
|
3,744,886
|
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The preliminary purchase price allocation above, as of the acquisition date, includes acquired assets and liabilities that were classified by the Company as held for sale (Note 4).
The following table presents certain information on the acquired intangible assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
Fair value
|
|
Estimated useful lives (years)
|
|
Weighted-average estimated useful lives (years)
|
Customer relationships
|
|
$
|
563,428
|
|
|
13.5
|
|
13.5
|
Trade names
|
|
72,033
|
|
|
1.5
|
|
1.5
|
Favorable leases
|
|
22,024
|
|
|
2.4 - 33.0
|
|
13.6
|
The fair value of customer relationships was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the revenue. The Company applied a weighted-average discount rate of approximately
8.5%
, which reflected the nature of the assets as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the TelecityGroup trade name was estimated using the relief of royalty approach. The Company applied a relief of royalty rate of
2.0%
and a weighted-average discount rate of approximately
9.0%
. The other acquired identifiable intangible assets were estimated by applying a relief of royalty or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.
The fair value of the property, plant and equipment was estimated by applying the income approach or cost approach. The income approach is used to estimate fair value based on the income stream, such as cash flows or earnings that an asset can be expected to generate over its useful live. There are two primary methods of applying the income approach to determine the fair value assets: the discounted cash flow method and the direct capitalization method. The key assumptions include the estimated earnings, discount rate and direct capitalization rate. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The premise of the cost approach is that a market participant would pay no more for an asset than the amount that the asset could be replaced or reproduced. The key assumptions of the cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age.
The Company determined the fair value of the loans payable assumed in the TelecityGroup acquisition by estimating TelecityGroup’s debt rating and reviewing market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. On January 15, 2016, the Company prepaid and terminated these loans payable. In conjunction with the repayment of the loans payable, the Company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the condensed consolidated statement of operations.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the acquisition. The goodwill is not expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the TelecityGroup acquisition, except for the goodwill associated with asset held for sale, is attributable to the Company’s EMEA region. For the three months ended June 30, 2016, the Company's results of continuing operations include TelecityGroup revenues of
$107,246,000
and net loss from continuing operations of
$35,858,000
. For the six months ended June 30, 2016, the Company's results of continuing operations include TelecityGroup revenues of
$191,685,000
and net loss from continuing operations of
$38,679,000
for the period January 15, 2016 through June 30, 2016.
Bit-isle Acquisition
On November 2, 2015, the Company completed a cash tender offer for approximately
97%
of the equity instruments, including stock options, of Tokyo-based Bit-isle. The Company acquired the remaining outstanding equity instruments of Bit-isle in December 2015. The offer price was JPY
922
per share, in an all cash transaction totaling approximately
$275,367,000
. The Company acquired Bit-isle to expand additional data centers in Japan for customer's future expansion needs.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
On September 30, 2015, the Company entered into a term loan agreement (the “Bridge Term Loan Agreement”) with the Bank of Tokyo-Mitsubishi UFJ, Ltd. (“BTMU”). Pursuant to the Bridge Term Loan Agreement, BTMU committed to provide a senior bridge loan facility (the “Bridge Term Loan”) in the amount of up to
¥47,500,000,000
, or approximately
$459,800,000
in U.S. dollars at the exchange rate in effect on June 30, 2016. Proceeds from the Bridge Term Loan were to be used exclusively for the acquisition of Bit-isle, the repayment of Bit-isle’s existing debt and transaction costs incurred in connection with the closing of the Bridge Term Loan and the acquisition of Bit-isle.
The Company included Bit-isle’s results of operations from November 2, 2015 and the estimated fair value of assets acquired and liabilities assumed in its consolidated balance sheets beginning November 2, 2015.
The Company has initially designated the legal entities acquired in the Bit-isle acquisition as TRSs.
Purchase Price Allocation
Under the acquisition method of accounting, the total purchase price was allocated to Bit-isle’s net tangible and intangible assets based upon their fair value as of the Bit-isle acquisition date. Under the accounting guidance, the Company can adjust the fair value of acquired assets and liabilities assumed in the measurement period, as it obtains new information regarding the facts and circumstances that existed at the acquisition date. Based upon the purchase price and the valuation of Bit-isle, the purchase price allocation was as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
33,198
|
|
Accounts receivable
|
7,359
|
|
Other current assets
|
51,038
|
|
Long-term investments
|
3,806
|
|
Property, plant and equipment
|
308,985
|
|
Goodwill
|
95,444
|
|
Intangible assets
|
111,374
|
|
Other assets
|
22,981
|
|
Total assets acquired
|
634,185
|
|
Accounts payable and accrued expenses
|
(15,028
|
)
|
Accrued property, plant and equipment
|
(465
|
)
|
Capital lease and other financing obligations
|
(108,833
|
)
|
Mortgage and loans payable
|
(190,227
|
)
|
Other current liabilities
|
(8,689
|
)
|
Deferred tax liabilities
|
(32,192
|
)
|
Other liabilities
|
(3,384
|
)
|
Net assets acquired
|
$
|
275,367
|
|
The following table presents certain information on the acquired identifiable intangible assets (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
Fair value
|
|
Estimated useful lives (years)
|
|
Weighted-average estimated useful lives (years)
|
Customer relationships
|
|
$
|
105,434
|
|
|
13
|
|
13
|
Trade name
|
|
3,455
|
|
|
2
|
|
2
|
Favorable solar contracts
|
|
2,410
|
|
|
18
|
|
18
|
Other intangible assets
|
|
75
|
|
|
0.25
|
|
0.25
|
The fair value of customer relationships was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
revenue. The Company applied a weighted-average discount rate of approximately
11.0%
, which reflected the nature of the assets as it relates to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value of the Bit-isle trade name was estimated using the relief of royalty approach. The Company applied a relief of royalty rate of
2.0%
and a weighted-average discount rate of approximately
12.0%
. The other acquired identifiable intangible assets were estimated by applying an income or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.
The fair value of the property, plant and equipment was estimated by applying the income approach or cost approach. The income approach is used to estimate fair value based on the income stream, such as cash flows or earnings that an asset can be expected to generate over its useful live. There are two primary methods of applying the income approach to determine the fair value assets: the discounted cash flow method and the direct capitalization method. The key assumptions include the estimated earnings, discount rate and direct capitalization rate. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The premise of the cost approach is that a market participant would pay no more for an asset than the amount that the asset could be replaced or reproduced. The key assumptions of the cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age.
The Company determined the fair value of the loans payable assumed in the Bit-isle Acquisition by estimating Bit-isle’s debt rating and reviewed market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. During the year ended December 31, 2015, the Company prepaid and terminated the majority of these loans payable. In conjunction with the repayment of the loans payable, the Company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the consolidated statement of operations for the year ended December 31, 2015.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The goodwill is attributable to the workforce of the acquired business and the significant synergies expected to arise after the acquisition. The goodwill is not expected to be deductible for local tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the Bit-isle acquisition is attributable to the Company’s Asia-Pacific region. For the three and six months ended June 30, 2016, the Company's results of continuing operations include Bit-isle revenues of
$37,294,000
and
$71,498,000
and Bit-isle net losses of
$3,532,000
and
$7,745,000
.
Nimbo Acquisition
On January 14, 2015, the Company acquired all of the issued and outstanding share capital of Nimbo, a company which specializes in migrating business applications to the cloud with extensive experience moving legacy applications into a hybrid cloud architecture, and connecting legacy data centers to the cloud, for a cash payment of
$10,000,000
and a contingent earn-out arrangement to be paid over
two
years (the “Nimbo Acquisition”). Subsequent to the acquisition, Nimbo adopted the name Equinix Professional Services for Cloud. The Nimbo Acquisition was accounted for using the acquisition method. As a result of the Nimbo Acquisition, the Company recorded goodwill of
$17,192,000
, which represents the excess of the total purchase price over the fair value of the assets acquired and liabilities assumed. The Company recorded the contingent earn-out arrangement at its estimated fair value. The results of operations for Nimbo are not significant to the Company; therefore, the Company does not present its purchase price allocation or pro forma combined results of operations. In addition, any prospective changes in the Company’s earn-out estimates are not expected to have a material effect on the Company’s consolidated statement of operations.
Unaudited Pro Forma Combined Consolidated Financial Information
The following unaudited pro forma combined consolidated financial information has been prepared by the Company using the acquisition method of accounting to give effect to the TelecityGroup and Bit-isle acquisitions as though the acquisitions occurred on January 1, 2015. The Company completed the TelecityGroup acquisition on January 15, 2016. The operating results of TelecityGroup were included in the condensed consolidated statement of operations for the three months ended June 30, 2016. TelecityGroup's operating results for the period January 15, 2016 through June 30, 2016 were included in the condensed consolidated statement of operations for the six months ended June 30, 2016. The pro forma effect for the period January 1 through January 14, 2016 was insignificant. The unaudited pro forma combined consolidated financial information reflects certain adjustments, such as additional depreciation, amortization and interest expense on assets and liabilities acquired.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the acquisitions occurred on the above dates, nor is it necessarily indicative of the future results of operations of the combined company.
The following table sets forth the unaudited pro forma consolidated combined results of operations for the three and six months ended June 30, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2015
|
|
2015
|
Revenues
|
$
|
796,850
|
|
|
$
|
1,570,851
|
|
Net income from continuing operations
|
40,047
|
|
|
91,769
|
|
Basic EPS
|
0.63
|
|
|
1.44
|
|
Diluted EPS
|
0.62
|
|
|
1.43
|
|
4. Assets Held for Sale
During the fourth quarter of 2015, the Company entered into an agreement to sell a parcel of land in San Jose, California and reported the San Jose land parcel as an asset held for sale in the accompanying consolidated balance sheet as of December 31, 2015. The sale was completed in February 2016.
In order to obtain the approval of the European Commission for the acquisition of TelecityGroup, the Company and TelecityGroup agreed to divest certain data centers, including the Company’s LD2 data center and certain data centers of TelecityGroup in the United Kingdom, Netherlands and Germany. The assets and liabilities of LD2, which were included within the EMEA operating segment, were classified as held for sale in the fourth quarter of 2015 and, therefore, the corresponding depreciation and amortization expense was ceased at that time. This divestiture was not presented as discontinued operations in the consolidated statements of operations, because it did not represent a strategic shift in the Company's business, as the Company continued operating similar businesses after the acquisition. During the three months ended June 30, 2016 and 2015, LD2 generated revenue of
$2,950,000
and
$4,746,000
, respectively. Net income generated by LD2 during the three months ended June 30, 2016 was insignificant. Net income generated by LD2 during the three months ended June 30, 2015 was
$2,006,000
. During the six months ended June 30, 2016 and 2015, LD2 generated revenue of
$6,116,000
and
$9,429,000
, respectively. Net income generated by LD2 during the six months ended June 30, 2016 and 2015 was
$2,327,000
and
$3,880,000
, respectively.
The acquisition of TelecityGroup closed on January 15, 2016. Accordingly, the assets and liabilities of the TelecityGroup data centers that were divested were included in assets and liabilities held for sale in the condensed consolidated balance sheet as of June 30, 2016. The results of operations for the TelecityGroup data centers that were divested were classified as discontinued operations from January 15, 2016, the date the acquisition closed, through June 30, 2016. This divestiture transaction closed on July 5, 2016 (see Note 13).
In June 2016, the Company approved the divestiture of the solar power assets of Bit-isle. The assets and liabilities of the solar power assets that will be divested were included in assets and liabilities held for sale in the condensed consolidated balance sheet as of June 30, 2016. During the three and six months ended June 30, 2016, the revenues and net income generated from solar power assets were insignificant.
When an asset is classified as held for sale, the asset's book value is evaluated and adjusted to the lower of its carrying amount or fair value less cost to sell. The determination of fair value for assets is dependent upon, among other factors, the potential sales transaction, composition of assets in the disposal group, the comparability of the disposal group to market transactions and negotiations with third party purchasers, etc. Such factors impact the range of potential fair values and the selection of the best estimates. As of June 30, 2016 and December 31, 2015, the Company determined that assets held for sale had not been impaired.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table summarizes assets and liabilities that were classified in assets and liabilities held for sale as of June 30, 2016 and December 31, 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Cash
|
$
|
25,111
|
|
|
$
|
—
|
|
Accounts receivable
|
15,470
|
|
|
2,222
|
|
Other current assets
|
78,013
|
|
|
408
|
|
Property, plant and equipment
|
238,742
|
|
|
23,533
|
|
Goodwill
|
461,558
|
|
|
5,000
|
|
Intangible assets
|
199,062
|
|
|
784
|
|
Other assets
|
6,710
|
|
|
1,310
|
|
Total assets held for sale
|
1,024,666
|
|
|
$
|
33,257
|
|
|
|
|
|
Accounts payable, accrued expenses and estimated costs to sell
|
$
|
(46,355
|
)
|
|
$
|
(654
|
)
|
Accrued property, plant and equipment
|
(13,151
|
)
|
|
(816
|
)
|
Current portion of capital lease and other financing obligation
|
(36,835
|
)
|
|
—
|
|
Other current liabilities
|
(27,167
|
)
|
|
(435
|
)
|
Capital lease and other financing obligations, less current portion
|
(18,561
|
)
|
|
—
|
|
Other liabilities
|
(10,055
|
)
|
|
(1,630
|
)
|
Total liabilities held for sale
|
$
|
(152,124
|
)
|
|
$
|
(3,535
|
)
|
|
|
5.
|
Discontinued Operations
|
In order to obtain the approval of the European Commission for the acquisition of TelecityGroup, the Company and TelecityGroup agreed to divest certain data centers of TelecityGroup in the United Kingdom, Netherlands and Germany. Accounting guidance requires a business activity that, on acquisition, meets the criteria to be classified as held for sale be reported as a discontinued operation. Accordingly, the results of operations for these data centers that were divested have been reported as net income from discontinued operations, net of tax, from January 15, 2016, the date of the acquisition, through June 30, 2016 in the Company's condensed consolidated statement of operations. This divestiture transaction closed on July 5, 2016 (see Note 13).
The following table presents the financial results of the discontinued operations:
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
Revenues
|
$
|
30,401
|
|
|
$
|
50,982
|
|
Costs and operating expenses:
|
|
|
|
Cost of revenues
|
13,490
|
|
|
25,100
|
|
Sales and marketing
|
979
|
|
|
1,196
|
|
General and administrative
|
6,920
|
|
|
7,303
|
|
Total costs and operating expenses
|
21,389
|
|
|
33,599
|
|
Income from operations of discontinued operations
|
9,012
|
|
|
17,383
|
|
Interest and other, net
|
(708
|
)
|
|
(1,177
|
)
|
Income from discontinued operations before income taxes
|
8,304
|
|
|
16,206
|
|
Income tax expense
|
(2,895
|
)
|
|
(4,581
|
)
|
Income from discontinued operations, net of income taxes
|
$
|
5,409
|
|
|
$
|
11,625
|
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Net cash used in operating activities for discontinued operations was
$2,955,000
and net cash used in investing activities for discontinued operations was
$35,701,000
for the period ended June 30, 2016.
No gain or loss on the disposition of the assets and liabilities of these data centers has been recognized in the condensed consolidated financial statements.
|
|
6.
|
Derivatives and Hedging Activities
|
Derivatives Designated as Hedging Instruments
Net Investment Hedges.
The Company is exposed to the impact of foreign exchange rate fluctuations in investments in its wholly-owned foreign subsidiaries that are denominated in currencies other than the U.S. dollar.
In order to mitigate the volatility in foreign currency exchange rates, the Company has entered into various foreign currency loans which are designated as hedges against the Company's net investment in foreign subsidiaries. In April 2015, the Company entered into a foreign currency term loan ("Term Loan A") and designated 100% of the Term Loan A to hedge its net investments in its wholly-owned foreign subsidiaries that are denominated in the same foreign currencies as the term loan.
In December 2015, the Company terminated hedging its net investment in subsidiaries that are denominated in Swiss Francs. In January 2016, the Company borrowed the full amount of the
$250,000,000
and
£300,000,000
seven
year term loan commitments made available to it under the second amendment to the Company's Senior Credit Facility ("Term Loan B"). The Company designated the portion of Term Loan B that is denominated in the British pound to hedge the net investments in its wholly-owned foreign subsidiaries. In March 2016, the Company began using foreign exchange forward contracts to hedge against the effect of foreign exchange rate fluctuations on a portion of its net investment in the EMEA operations. The total principal amount of foreign currency loans outstanding as of June 30, 2016 and December 31, 2015, which were designated as net investment hedges, was
$793,264,000
and
$411,881,000
, respectively. For a net investment hedge, most changes in the fair value of the hedging instrument designated as a net investment hedge, except the ineffective portion, are recorded as a component of other comprehensive income in the condensed consolidated balance sheet. The Company recorded net foreign exchange gains of
$55,196,000
and
$38,884,000
in other comprehensive income (loss) for the three and six months ended
June 30, 2016
and foreign exchange losses of
$10,389,000
in other comprehensive income (loss) for the three and six months ended June 30, 2015. The Company recorded no ineffectiveness from its net investment hedges for the three and six months ended June 30, 2016 and 2015.
Cash Flow Hedges.
The Company hedges its exposure to foreign currency exchange rate fluctuations for forecasted revenues and expenses in its EMEA region in order to help manage the Company’s exposure to foreign currency exchange rate fluctuations between the U.S. dollar and the British Pound, Euro and Swiss Franc. The foreign currency forward and option contracts that the Company uses to hedge this exposure are designated as cash flow hedges under the accounting standard for derivatives and hedging. The Company also uses purchased collar options to manage a portion of its exposure to foreign currency exchange rate fluctuations, where the Company writes a foreign currency call option and purchases a foreign currency put option. When two or more derivative instruments in combination are jointly designated as a cash flow hedging instrument, they are treated as a single instrument.
Effective January 1, 2015, the Company entered into intercompany hedging instruments (“intercompany derivatives”) with a wholly-owned subsidiary of the Company and simultaneously entered into derivative contracts with unrelated parties to hedge certain forecasted revenues and expenses denominated in currencies other than the U.S. dollar.
The following disclosure is prepared on a consolidated basis. Assets and liabilities resulting from intercompany derivatives have been eliminated in consolidation.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
As of
June 30, 2016
, the Company’s cash flow hedges had maturity dates ranging from July 2016 to June 2018 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair Value
(1)
|
|
Accumulated other
comprehensive
income (loss)
(2) (3)
|
Derivative assets
|
$
|
480,206
|
|
|
$
|
29,714
|
|
|
$
|
58,953
|
|
Derivative liabilities
|
120,003
|
|
|
(1,849
|
)
|
|
(33,494
|
)
|
|
$
|
600,209
|
|
|
$
|
27,865
|
|
|
$
|
25,459
|
|
|
|
(1)
|
All derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.
|
|
|
(2)
|
Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).
|
|
|
(3)
|
The Company recorded a net gain of
$16,742
within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expenses as they mature in the next
12 months
.
|
As of
December 31, 2015
, the Company’s cash flow hedges had maturities dates ranging from January 2016 to December 2017 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair Value
(1)
|
|
Accumulated other
comprehensive
income (loss)
(2)(3)
|
Derivative assets
|
$
|
367,330
|
|
|
$
|
16,027
|
|
|
$
|
34,578
|
|
Derivative liabilities
|
47,447
|
|
|
(813
|
)
|
|
(19,709
|
)
|
|
$
|
414,777
|
|
|
$
|
15,214
|
|
|
$
|
14,869
|
|
|
|
(1)
|
All derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.
|
|
|
(2)
|
Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).
|
|
|
(3)
|
The Company recorded a net gain of
$12,940
within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expense as they mature over the next 12 months.
|
During the three months ended
June 30, 2016
and
2015
, the ineffective and excluded portions of cash flow hedges recognized in other income (expense) were not significant. During the three months ended
June 30, 2016
, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was
$6,161,000
and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was
$2,846,000
. During the three months ended
June 30, 2015
, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was
$7,428,000
and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses were not significant.
During the six months ended
June 30, 2016
and
2015
, the ineffective and excluded portions of cash flow hedges recognized in other income (expense) were not significant. During the six months ended
June 30, 2016
, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was
$12,608,000
and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was
$6,677,000
. During the six months ended
June 30, 2015
, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was
$15,506,000
and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was
$2,983,000
.
Derivatives Not Designated as Hedging Instruments
Embedded Derivatives
. The Company is deemed to have foreign currency forward contracts embedded in certain of the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved. These embedded derivatives are separated from their host contracts and carried on the Company’s balance sheet at their fair value. The majority of these embedded derivatives arise as a result of the Company’s foreign subsidiaries pricing their customer contracts in the U.S. dollar. Gains and losses on these embedded derivatives are included within revenues in the Company’s condensed consolidated statements of operations. During the three months ended June 30, 2016, gains (losses) associated with
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
these embedded derivatives were not significant. During the three months ended June 30, 2015, the losses associated with these embedded derivatives were
$2,057,000
. During the six months ended June 30, 2016, the losses associated with these embedded derivatives were
$8,061,000
. During the six months ended June 30, 2015, gains (losses) associated with these embedded derivatives were not significant.
Economic Hedges of Embedded Derivatives.
The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved (“economic hedges of embedded derivatives”). Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Gains and losses on these contracts are included in revenues along with gains and losses of the related embedded derivatives. The Company entered into various economic hedges of embedded derivatives during the
three and six
months ended
June 30, 2016
and
2015
. During the three months ended June 30, 2016, the gains (losses) associated with these contracts were not significant. During the six months ended June 30, 2016, the gains associated with these contracts were
$5,578,000
. During the three and six months ended June 30, 2015, the gains (losses) from these contracts were not significant.
Foreign Currency Forward and Option Contracts.
The Company also uses foreign currency forward and option contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of its foreign currency-denominated assets and liabilities change. Gains and losses on these contracts are included in other income (expense), net, along with foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward and option contracts. The Company entered into various foreign currency forward and option contracts during the three and six months ended June 30, 2016 and 2015. During the three and six months ended
June 30, 2016
, the Company recognized net gains of
$49,072,000
and
$41,480,000
, respectively, associated with these contracts. During the three and six months ended June 30, 2015, the Company recognized net losses of
$12,719,000
and
$2,462,000
, respectively, associated with these contracts.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Offsetting Derivative Assets and Liabilities
The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of
June 30, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amounts
|
|
Gross
amounts
offset in the
balance
sheet
|
|
Net amounts
(1)
|
|
Gross
amounts not
offset in the
balance
sheet
(2)
|
|
Net
|
Assets:
|
|
|
|
|
|
|
|
|
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts
|
$
|
29,714
|
|
|
$
|
—
|
|
|
$
|
29,714
|
|
|
$
|
(1,745
|
)
|
|
$
|
27,969
|
|
Net Investment Hedges
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
12,547
|
|
|
—
|
|
|
12,547
|
|
|
—
|
|
|
12,547
|
|
|
42,261
|
|
|
—
|
|
|
42,261
|
|
|
(1,745
|
)
|
|
40,516
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Embedded derivatives
|
3,864
|
|
|
—
|
|
|
3,864
|
|
|
—
|
|
|
3,864
|
|
Economic hedges of embedded derivatives
|
2,719
|
|
|
—
|
|
|
2,719
|
|
|
(62
|
)
|
|
2,657
|
|
Foreign currency forward contracts
|
42,840
|
|
|
—
|
|
|
42,840
|
|
|
(271
|
)
|
|
42,569
|
|
|
49,423
|
|
|
—
|
|
|
49,423
|
|
|
(333
|
)
|
|
49,090
|
|
Additional netting benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(741
|
)
|
|
(741
|
)
|
|
$
|
91,684
|
|
|
$
|
—
|
|
|
$
|
91,684
|
|
|
$
|
(2,819
|
)
|
|
$
|
88,865
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
$
|
1,849
|
|
|
$
|
—
|
|
|
$
|
1,849
|
|
|
$
|
(1,745
|
)
|
|
$
|
104
|
|
Net Investment Hedges
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,849
|
|
|
—
|
|
|
1,849
|
|
|
(1,745
|
)
|
|
104
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Embedded derivatives
|
4,281
|
|
|
—
|
|
|
4,281
|
|
|
—
|
|
|
4,281
|
|
Economic hedges of embedded derivatives
|
62
|
|
|
—
|
|
|
62
|
|
|
(62
|
)
|
|
—
|
|
Foreign currency forward contracts
|
909
|
|
|
—
|
|
|
909
|
|
|
(271
|
)
|
|
638
|
|
|
5,252
|
|
|
—
|
|
|
5,252
|
|
|
(333
|
)
|
|
4,919
|
|
Additional netting benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(741
|
)
|
|
(741
|
)
|
|
$
|
7,101
|
|
|
$
|
—
|
|
|
$
|
7,101
|
|
|
$
|
(2,819
|
)
|
|
$
|
4,282
|
|
|
|
(1)
|
As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.
|
|
|
(2)
|
The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default.
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amounts
|
|
Gross
amounts
offset in the
balance
sheet
|
|
Net balance
sheet
amounts
(1)
|
|
Gross
amounts not
offset in the
balance
sheet
(2)
|
|
Net
|
Assets:
|
|
|
|
|
|
|
|
|
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts
|
$
|
16,027
|
|
|
$
|
—
|
|
|
$
|
16,027
|
|
|
$
|
(813
|
)
|
|
$
|
15,214
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Embedded derivatives
|
8,926
|
|
|
—
|
|
|
8,926
|
|
|
—
|
|
|
8,926
|
|
Economic hedges of embedded derivatives
|
744
|
|
|
—
|
|
|
744
|
|
|
—
|
|
|
744
|
|
Foreign currency forward contracts
|
43,203
|
|
|
—
|
|
|
43,203
|
|
|
(34,577
|
)
|
|
8,626
|
|
|
52,873
|
|
|
—
|
|
|
52,873
|
|
|
(34,577
|
)
|
|
18,296
|
|
Additional netting benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,512
|
)
|
|
(9,512
|
)
|
|
$
|
68,900
|
|
|
$
|
—
|
|
|
$
|
68,900
|
|
|
$
|
(44,902
|
)
|
|
$
|
23,998
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Foreign currency forward and option contracts
|
$
|
813
|
|
|
$
|
—
|
|
|
$
|
813
|
|
|
$
|
(813
|
)
|
|
$
|
—
|
|
Not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
Embedded derivatives
|
1,772
|
|
|
—
|
|
|
1,772
|
|
|
—
|
|
|
1,772
|
|
Economic hedges of embedded derivatives
|
417
|
|
|
—
|
|
|
417
|
|
|
—
|
|
|
417
|
|
Foreign currency forward contracts
|
76,923
|
|
|
—
|
|
|
76,923
|
|
|
(34,577
|
)
|
|
42,346
|
|
|
79,112
|
|
|
—
|
|
|
79,112
|
|
|
(34,577
|
)
|
|
44,535
|
|
Additional netting benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,512
|
)
|
|
(9,512
|
)
|
|
$
|
79,925
|
|
|
$
|
—
|
|
|
$
|
79,925
|
|
|
$
|
(44,902
|
)
|
|
$
|
35,023
|
|
|
|
(1)
|
As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.
|
|
|
(2)
|
The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default.
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
|
7.
|
Fair Value Measurements
|
The Company’s financial assets and liabilities measured at fair value on a recurring basis as of
June 30, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at
June 30,
2016
|
|
Fair value
measurement using
|
|
Level 1
|
|
Level 2
|
Assets:
|
|
|
|
|
|
Cash
|
$
|
428,805
|
|
|
$
|
428,805
|
|
|
$
|
—
|
|
Money market and deposit accounts
|
51,169
|
|
|
51,169
|
|
|
—
|
|
Publicly traded equity securities
|
5,932
|
|
|
5,932
|
|
|
—
|
|
Certificates of deposit
|
8,276
|
|
|
—
|
|
|
8,276
|
|
Derivative instruments
(1)
|
91,684
|
|
|
—
|
|
|
91,684
|
|
|
$
|
585,866
|
|
|
$
|
485,906
|
|
|
$
|
99,960
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments
(1)
|
$
|
7,101
|
|
|
$
|
—
|
|
|
$
|
7,101
|
|
|
|
(1)
|
Includes both foreign currency embedded derivatives and foreign currency forward and option contracts. Amounts are included within other current assets, other assets, others current liabilities and other liabilities in the Company’s accompanying condensed consolidated balance sheet.
|
The Company’s financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at
December 31,
2015
|
|
Fair value
measurement using
|
|
Level 1
|
|
Level 2
|
Assets:
|
|
|
|
|
|
Cash
|
$
|
1,139,554
|
|
|
$
|
1,139,554
|
|
|
$
|
—
|
|
Money market and deposit accounts
|
1,089,284
|
|
|
1,089,284
|
|
|
—
|
|
Publicly traded equity securities
|
3,353
|
|
|
3,353
|
|
|
—
|
|
Certificates of deposit
|
14,106
|
|
|
—
|
|
|
14,106
|
|
Derivative instruments
(1)
|
68,900
|
|
|
—
|
|
|
68,900
|
|
|
$
|
2,315,197
|
|
|
$
|
2,232,191
|
|
|
$
|
83,006
|
|
Liabilities:
|
|
|
|
|
|
Derivative instruments
(1)
|
$
|
79,925
|
|
|
$
|
—
|
|
|
$
|
79,925
|
|
|
|
(1)
|
Includes both foreign currency embedded derivatives and foreign currency forward and option contracts. Amounts are included within other current assets, other assets, other current liabilities and other liabilities in the Company’s accompanying condensed consolidated balance sheet.
|
The Company did not have any significant Level 3 financial assets or financial liabilities as of
June 30, 2016
and
December 31, 2015
.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Capital Lease and Other Financing Obligations
Tokyo 5 ("TY5") Equipment Leases
In February 2016, the Company entered into a lease agreement for certain equipment in TY5 data center in Tokyo metro area. The lease was accounted for as a capital lease. Monthly payments under the equipment lease will be made through February 2032 at an effective interest rate of
6.33%
. The total outstanding obligation under the equipment lease was approximately
¥3,074,947,000
, or
$29,765,000
in U.S. dollars at the exchange rate in effect as of June 30, 2016.
Maturities of Capital Lease and Other Financing Obligations
The Company’s capital lease and other financing obligations are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease
obligations
|
|
Other
financing
obligations
(1)
|
|
Total
|
2016 (6 months remaining)
|
$
|
40,876
|
|
|
$
|
43,105
|
|
|
$
|
83,981
|
|
2017
|
82,482
|
|
|
86,065
|
|
|
168,547
|
|
2018
|
82,660
|
|
|
82,392
|
|
|
165,052
|
|
2019
|
83,431
|
|
|
77,105
|
|
|
160,536
|
|
2020
|
83,455
|
|
|
74,488
|
|
|
157,943
|
|
Thereafter
|
970,714
|
|
|
784,716
|
|
|
1,755,430
|
|
Total minimum lease payments
|
1,343,618
|
|
|
1,147,871
|
|
|
2,491,489
|
|
Plus amount representing residual property value
|
—
|
|
|
543,082
|
|
|
543,082
|
|
Less amount representing interest
|
(620,552
|
)
|
|
(806,604
|
)
|
|
(1,427,156
|
)
|
Present value of net minimum lease payments
|
723,066
|
|
|
884,349
|
|
|
1,607,415
|
|
Less current portion
|
(25,094
|
)
|
|
(67,517
|
)
|
|
(92,611
|
)
|
|
$
|
697,972
|
|
|
$
|
816,832
|
|
|
$
|
1,514,804
|
|
(1)
Other financing obligations are primarily build-to-suit lease obligations.
Other financing obligations for data centers to be divested in connection with the Company's acquisition of TelecityGroup are included in liabilities held for sale in the condensed consolidated balance sheet as of June 30, 2016 and are not included in the summary of the Company's capital lease and other financing obligations above. Total minimum lease payments under those obligations totaled
$55,396,000
at June 30, 2016.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Mortgage and Loans Payable
The Company’s mortgage and loans payable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31, 2015
|
Term loans
|
$
|
1,086,495
|
|
|
$
|
456,740
|
|
Bridge term loan
|
459,800
|
|
|
386,547
|
|
Revolving credit facility borrowings
|
—
|
|
|
325,622
|
|
Brazil financings
|
2,841
|
|
|
27,113
|
|
Mortgage payable and other loans payable
|
49,509
|
|
|
47,677
|
|
|
1,598,645
|
|
|
1,243,699
|
|
Less amount representing debt discount and debt issuance cost
|
(14,642
|
)
|
|
(2,681
|
)
|
Plus amount representing mortgage premium
|
1,991
|
|
|
1,987
|
|
|
1,585,994
|
|
|
1,243,005
|
|
Less current portion
|
(511,331
|
)
|
|
(770,236
|
)
|
|
$
|
1,074,663
|
|
|
$
|
472,769
|
|
On January 8, 2016, the Company borrowed the full amount of the
$250,000,000
and
£300,000,000
seven
year term loan commitments made available to it under the second amendment to the Company's Senior Credit Facility. The
$250,000,000
seven
year term loan bears interest at
4.00%
per annum and will be repaid in quarterly installments of
$625,000
commencing on June 30, 2016 with the remaining
$233,125,000
due on January 8, 2023. The
£300,000,000
seven
year term loan bears interest at
4.50%
per annum and will be repaid in quarterly installments of
£750,000
commencing on June 30, 2016 with the remaining
£279,750,000
due on January 8, 2023. The
£299,250,000
outstanding term loan balance was approximately
$395,848,000
in U.S. dollars at the exchange rate in effect as of June 30, 2016.
On January 15, 2016, the Company prepaid and terminated loans payable of TelecityGroup. In conjunction with the repayment of the loans payable, the Company incurred an insignificant amount of pre-payment penalties and interest rate swap termination costs, which were recorded as interest expense in the condensed consolidated statement of operations. See Note 3 for additional information.
In February 2016, the Company borrowed the remaining
¥1,040,000,000
, or approximately
$10,067,000
in U.S. dollars at the exchange rate in effect as of June 30, 2016, available under its Bridge Term Loan Agreement.
In June 2016, the Company prepaid and terminated its 2012 and 2013 Brazil financings. In connection with this prepayment, the Company paid
90,652,000
Brazilian Reals including principal, accrued interest and termination fees, or approximately
$28,298,000
in U.S. dollars at the exchange rate in effect as of June 30, 2016. The loss on debt extinguishment recognized in the condensed consolidated statements of operations is insignificant for the three months ended June 30, 2016.
During the three months ended March 31, 2016, the Company repaid
$325,622,000
of borrowings under its revolving credit facility. No borrowings were outstanding under the revolving credit facility as of June 30, 2016.
Convertible Debt
The Company’s convertible debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
December 31, 2015
|
4.75% convertible subordinated notes
|
|
$
|
150,082
|
|
Less amount representing debt discount and debt issuance cost
|
|
(3,961
|
)
|
|
|
$
|
146,121
|
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
4.75% Convertible Subordinated Notes
In April and June 2016, holders of the
4.75%
Convertible Subordinated Notes converted or redeemed a total of
$150,082,000
of the principal amount of the notes for
1,981,662
shares of the Company’s common stock and
$3,619,000
in cash, comprised of accrued interest, cash paid in lieu of fractional shares and principal redemption. In the Company’s consolidated statement of cash flows for the six months ended June 30, 2016, the principal redemption and cash paid in lieu of issuing fractional shares to settle a portion of the principal amount were included within net cash provided by (used in) financing activities and the accrued interest paid was included within net cash provided by operating activities.
To minimize the impact of potential dilution upon conversion of the
4.75%
convertible subordinated notes, the Company entered into capped call transactions (the “Capped Call”) separate from the issuance of the
4.75%
convertible subordinated notes and paid a premium of
$49,664,000
for the Capped Call in 2009. Upon maturity of the
4.75%
convertible subordinated notes on June 15, 2016, the Company settled the capped call transaction and received
380,779
shares of common stock, which were placed in treasury and resulted in a credit of
$141,688,000
to additional paid in capital at the market price of
$372.10
on June 15, 2016.
Senior Notes
The Company’s senior notes consisted of the following as of (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31, 2015
|
5.375% Senior Notes due 2023
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
5.375% Senior Notes due 2022
|
750,000
|
|
|
750,000
|
|
4.875% Senior Notes due 2020
|
500,000
|
|
|
500,000
|
|
5.75% Senior Notes due 2025
|
500,000
|
|
|
500,000
|
|
5.875% Senior Notes due 2026
|
1,100,000
|
|
|
1,100,000
|
|
|
3,850,000
|
|
|
3,850,000
|
|
Less amount representing debt issuance cost
|
(42,184
|
)
|
|
(45,366
|
)
|
|
$
|
3,807,816
|
|
|
$
|
3,804,634
|
|
Maturities of Debt Facilities
The following table sets forth maturities of the Company’s debt, including mortgage and loans payable and senior notes and excluding debt discounts and premium as of
June 30, 2016
(in thousands):
|
|
|
|
|
Year ending:
|
|
2016 (6 months remaining)
|
$
|
485,875
|
|
2017
|
50,624
|
|
2018
|
50,717
|
|
2019
|
351,049
|
|
2020
|
510,039
|
|
Thereafter
|
4,002,332
|
|
|
$
|
5,450,636
|
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Fair Value of Debt Facilities
The following table sets forth the estimated fair values of the Company’s mortgage and loans payable, senior notes and convertible debt, including current maturities, as of (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31, 2015
|
Mortgage and loans payable
|
$
|
1,596,555
|
|
|
$
|
916,602
|
|
Convertible debt
|
—
|
|
|
151,997
|
|
Senior notes
|
3,993,575
|
|
|
3,954,000
|
|
Revolving credit line
|
—
|
|
|
325,617
|
|
The Company has determined that the inputs used to value its debt facilities fall within Level 2 of the fair value hierarchy.
Interest Charges
The following table sets forth total interest costs incurred and total interest costs capitalized for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Interest expense
|
$
|
100,332
|
|
|
$
|
74,496
|
|
|
$
|
201,195
|
|
|
$
|
143,287
|
|
Interest capitalized
|
3,183
|
|
|
1,663
|
|
|
5,476
|
|
|
6,542
|
|
Interest charges incurred
|
$
|
103,515
|
|
|
$
|
76,159
|
|
|
$
|
206,671
|
|
|
$
|
149,829
|
|
|
|
10.
|
Commitments and Contingencies
|
Purchase Commitments
Primarily as a result of the Company’s various IBX expansion projects, as of
June 30, 2016
, the Company was contractually committed for
$441.9 million
of unaccrued capital expenditures, primarily for IBX infrastructure equipment not yet delivered and labor not yet provided, in connection with the work necessary to open these IBX data centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of
June 30, 2016
, such as commitments to purchase power in select locations through the remainder of
2016
and thereafter, and other open purchase orders for goods or services to be delivered or provided during the remainder of
2016
and thereafter. Such other miscellaneous purchase commitments totaled
$507.5 million
as of
June 30, 2016
.
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of tax, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31,
2015
|
|
Net
Change
|
|
Balance as of
June 30,
2016
|
Foreign currency translation adjustment (“CTA”) loss
|
$
|
(523,709
|
)
|
|
$
|
(182,462
|
)
|
|
$
|
(706,171
|
)
|
Unrealized gain on cash flow hedges
|
11,153
|
|
|
7,942
|
|
|
19,095
|
|
Unrealized gain (loss) on available-for-sale securities
|
(139
|
)
|
|
895
|
|
|
756
|
|
Net investment hedge CTA gain
|
4,484
|
|
|
38,884
|
|
|
43,368
|
|
Net actuarial gain (loss) on defined benefit plans
|
(848
|
)
|
|
14
|
|
|
(834
|
)
|
|
$
|
(509,059
|
)
|
|
$
|
(134,727
|
)
|
|
$
|
(643,786
|
)
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Changes in foreign currency exchange rates can have a significant impact to the Company’s consolidated balance sheets (as evidenced above in the Company’s foreign currency translation gain or loss), as well as its consolidated results of operations, as amounts in foreign currencies generally translate into more U.S. dollars when the U.S. dollar weakens or fewer U.S. dollars when the U.S. dollar strengthens. As of
June 30, 2016
, the U.S. dollar was generally stronger relative to certain of the currencies of the foreign countries in which the Company operates. This overall strengthening of the U.S. dollar had an overall unfavorable impact on the Company’s consolidated financial position because the foreign denominations translated into fewer U.S. dollars as evidenced by an increase in foreign currency translation loss for the six months ended
June 30, 2016
as reflected in the above table. In future periods, the volatility of the U.S. dollar as compared to the other currencies in which the Company operates could have a significant impact on its consolidated financial position and results of operations including the amount of revenue that the Company reports in future periods.
Dividends
On
February 18, 2016
, the Company declared a quarterly cash dividend of
$1.75
per share, with a record date of
March 9, 2016
and a payment date of
March 23, 2016
. The Company paid a total of
$121,494,000
on March 23, 2016 for the first quarter cash dividend. In addition, the Company accrued an additional
$1,366,000
in dividends payable for the restricted stock units that have not yet vested.
On May 4, 2016, the Company declared a quarterly cash dividend of
$1.75
per share, with a record date of May 25, 2016 and a payment date of June 15, 2016. The Company paid a total of
$121,530,000
on June 15, 2016 for the second quarter cash dividend. In addition, the Company accrued an additional
$2,053,000
in dividends payable for restricted stock units that have not yet vested.
Stock-Based Compensation
In the first half of 2016, the Compensation Committee and the Stock Award Committee of the Company’s Board of Directors approved the issuance of an aggregate of
530,068
shares of restricted stock units to certain employees, including executive officers, pursuant to the 2000 Equity Incentive Plan, as part of the Company’s annual refresh program. These equity awards are subject to vesting provisions and have a weighted-average grant date fair value of
$290.89
and a weighted-average requisite service period of
3.47
years. The valuation of restricted stock units with only a service condition or a service and performance condition requires no significant assumptions as the fair value for these types of equity awards is based solely on the fair value of the Company’s stock price on the date of grant. The Company used revenue and adjusted funds from operations (“AFFO”) as the performance measurements in the restricted stock units with both service and performance conditions that were granted in February 2016 and 2015, whereby revenue and adjusted earnings before interest, taxes, depreciation and amortization (“EBITDA”) were used as the performance measurements in prior years’ grants.
The Company uses a Monte Carlo simulation option-pricing model to determine the fair value of restricted stock units with a service and market condition. There were no significant changes in the assumptions used to determine the fair value of restricted stock units with a service and market condition that were granted in 2016 compared to the prior year.
The following table presents, by operating expense category, the Company’s stock-based compensation expense recognized in the Company’s condensed consolidated statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Cost of revenues
|
$
|
3,441
|
|
|
$
|
2,551
|
|
|
$
|
6,438
|
|
|
$
|
4,857
|
|
Sales and marketing
|
10,714
|
|
|
9,922
|
|
|
20,485
|
|
|
18,633
|
|
General and administrative
|
25,168
|
|
|
21,520
|
|
|
46,915
|
|
|
41,116
|
|
|
$
|
39,323
|
|
|
$
|
33,993
|
|
|
$
|
73,838
|
|
|
$
|
64,606
|
|
While the Company has a single line of business, which is the design, build-out and operation of IBX data centers, it has determined that it has
three
reportable segments comprised of its Americas, EMEA and Asia-Pacific geographic regions. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources based on
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
the Company’s revenue and adjusted EBITDA performance both on a consolidated basis and based on these three reportable segments. The Company defines adjusted EBITDA as income from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges, acquisition costs and gains on asset sales as presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
Americas
|
$
|
195,028
|
|
|
$
|
170,886
|
|
|
$
|
379,488
|
|
|
$
|
343,620
|
|
EMEA
|
133,455
|
|
|
79,533
|
|
|
244,944
|
|
|
155,564
|
|
Asia-Pacific
|
91,808
|
|
|
60,843
|
|
|
176,509
|
|
|
117,826
|
|
Total adjusted EBITDA
|
420,291
|
|
|
311,262
|
|
|
800,941
|
|
|
617,010
|
|
Depreciation, amortization and accretion expense
|
(213,719
|
)
|
|
(128,270
|
)
|
|
(415,872
|
)
|
|
(250,800
|
)
|
Stock-based compensation expense
|
(39,323
|
)
|
|
(33,993
|
)
|
|
(73,838
|
)
|
|
(64,606
|
)
|
Acquisition costs
|
(15,594
|
)
|
|
(9,866
|
)
|
|
(52,130
|
)
|
|
(11,022
|
)
|
Gains on asset sales
|
—
|
|
|
—
|
|
|
5,242
|
|
|
—
|
|
Income from continuing operations
|
$
|
151,655
|
|
|
$
|
139,133
|
|
|
$
|
264,343
|
|
|
$
|
290,582
|
|
The Company also provides the following additional segment disclosures (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Total revenues:
|
|
|
|
|
|
|
|
Americas
|
$
|
413,471
|
|
|
$
|
371,447
|
|
|
$
|
817,865
|
|
|
$
|
735,416
|
|
EMEA
|
300,609
|
|
|
173,967
|
|
|
568,465
|
|
|
338,590
|
|
Asia-Pacific
|
186,430
|
|
|
120,168
|
|
|
358,336
|
|
|
234,750
|
|
|
$
|
900,510
|
|
|
$
|
665,582
|
|
|
$
|
1,744,666
|
|
|
$
|
1,308,756
|
|
Total depreciation and amortization:
|
|
|
|
|
|
|
|
Americas
|
$
|
78,402
|
|
|
$
|
69,226
|
|
|
$
|
154,661
|
|
|
$
|
135,953
|
|
EMEA
|
82,504
|
|
|
27,633
|
|
|
158,554
|
|
|
54,140
|
|
Asia-Pacific
|
51,145
|
|
|
30,517
|
|
|
99,370
|
|
|
58,919
|
|
|
$
|
212,051
|
|
|
$
|
127,376
|
|
|
$
|
412,585
|
|
|
$
|
249,012
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
Americas
|
$
|
115,989
|
|
|
$
|
104,400
|
|
|
$
|
199,489
|
|
|
$
|
187,126
|
|
EMEA
|
86,582
|
|
|
56,927
|
|
|
143,855
|
|
|
84,483
|
|
Asia-Pacific
|
47,296
|
|
|
60,015
|
|
|
104,223
|
|
|
99,853
|
|
|
$
|
249,867
|
|
|
$
|
221,342
|
|
|
$
|
447,567
|
|
|
$
|
371,462
|
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The Company’s long-lived assets are located in the following geographic areas as of (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
2016
|
|
December 31,
2015
|
Americas
|
$
|
3,184,491
|
|
|
$
|
3,025,450
|
|
EMEA
|
2,220,500
|
|
|
1,157,304
|
|
Asia-Pacific
|
1,553,803
|
|
|
1,423,682
|
|
|
$
|
6,958,794
|
|
|
$
|
5,606,436
|
|
Revenue information on a services basis is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Colocation
|
$
|
662,669
|
|
|
$
|
496,610
|
|
|
$
|
1,282,562
|
|
|
$
|
978,155
|
|
Interconnection
|
135,721
|
|
|
104,661
|
|
|
262,926
|
|
|
206,319
|
|
Managed infrastructure
|
45,243
|
|
|
23,466
|
|
|
89,979
|
|
|
47,321
|
|
Other
|
8,138
|
|
|
1,954
|
|
|
13,398
|
|
|
4,553
|
|
Recurring revenues
|
851,771
|
|
|
626,691
|
|
|
1,648,865
|
|
|
1,236,348
|
|
Non-recurring revenues
|
48,739
|
|
|
38,891
|
|
|
95,801
|
|
|
72,408
|
|
|
$
|
900,510
|
|
|
$
|
665,582
|
|
|
$
|
1,744,666
|
|
|
$
|
1,308,756
|
|
No single customer accounted for
10%
or greater of the Company’s revenues for the three and six months ended
June 30, 2016
and
2015
. No single customer accounted for
10%
or greater of the Company’s gross accounts receivable as of
June 30, 2016
and
December 31, 2015
.
On July 5, 2016, the Company completed the sale of
eight
data centers and related assets in its European business to Digital Realty Trust, Inc. ("Digital Realty") for approximately
€304,564,000
and
£376,171,000
, or approximately
$827,185,000
at the exchange rate in effect on July 5, 2016. On August 1, 2016, the Company purchased Digital Realty’s operating business, including its real estate and facility, in St. Denis, Paris, where the Company has an established presence with
two
IBX data centers, for approximately
€189,645,000
or
$211,700,000
at the exchange rate in effect on August 1, 2016. The acquisition of these two data centers will be accounted using the acquisition method of accounting in accordance with the accounting standard for business combinations. The preliminary purchase price allocation for acquisition is not currently available as the appraisals necessary to assess fair values of assets acquired and liabilities assumed are not yet complete.
On August 3, 2016, the Company declared a quarterly cash dividend of
$1.75
per share, which is payable on September 14, 2016 to the Company’s common stockholders of record as of the close of business on August 24, 2016.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words ‘‘believes,’’ ‘‘anticipates,’’ ‘‘plans,’’ ‘‘expects,’’ ‘‘intends’’ and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Liquidity and Capital Resources’’ below and ‘‘Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. All forward-looking statements in this document are based on information available to us as of the date of this Report and we assume no obligation to update any such forward-looking statements.
Our management’s discussion and analysis of financial condition and results of operations is intended to assist readers in understanding our financial information from our management’s perspective and is presented as follows:
|
|
•
|
Non-GAAP Financial Measures
|
|
|
•
|
Liquidity and Capital Resources
|
|
|
•
|
Contractual Obligations and Off-Balance-Sheet Arrangements
|
|
|
•
|
Critical Accounting Policies and Estimates
|
|
|
•
|
Recent Accounting Pronouncements
|
Overview
In April and June 2016, 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, holders of our 4.75% Convertible Subordinated Notes converted or redeemed a total of $150,082,000 of the principal amount of the notes for 1,981,662 shares of our common stock and $3,619,000 in cash, comprised of accrued interest, cash paid in lieu of fractional shares and principal redemption. Upon maturity of our 4.75% Convertible Subordinated Notes on June 15, 2016, we settled the capped call transaction and received 380,779 shares of common stock, which was placed in treasury and resulted in a credit of $141,688,000 to additional paid in capital at the market price of $372.10 on June 15, 2016.
In January 2016, as more fully described in Note 3 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we completed our acquisition of Telecity Group plc ("TelecityGroup") for a total purchase price of approximately $1.7 billion in cash and 6.9 million shares of our common stock valued at approximately $2.1 billion, for a total of $3.8 billion. In January 2016, we terminated our bridge credit agreement for £875.0 million, or approximately $1.3 billion, related to the TelecityGroup acquisition.
In January 2016, as more fully described in Notes 4 and 5 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we agreed to divest eight data centers and related assets, including our London 2 data center in London, UK ("LD2") and seven data centers of TelecityGroup in order to obtain the approval of the European Commission for the acquisition of TelecityGroup. Assets and liabilities of these data centers were included in assets and liabilities held for sale in the condensed consolidated balance sheet as of June 30, 2016. The results of operations for the seven TelecityGroup data centers were classified as net income from discontinued operations, net of tax, from January 15, 2016, the date of the acquisition, through June 30, 2016 in our condensed consolidated statement of operations. In July 2016, as more fully described in Note 13 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q, we completed the sale of these data centers and related assets to Digital Realty Trust, Inc. ("Digital Realty") for approximately
$827.2 million
at the exchange rate in effect on July 5, 2016. On August 1, 2016, the Company purchased Digital Realty’s operating business, including its real estate and facility, in St. Denis, Paris, where the Company has an established presence with two IBX data centers, for total cash consideration of approximately
€189.6 million
or
$211.7 million
at the exchange rate in effect on August 1, 2016.
In January 2016, as more fully described in Note 9 of Notes to Condensed Consolidated Financial Statements, we borrowed the full amount of the $250.0 million and £300.0 million, or $431.3 million, made available to us under the second amendment to our Senior Credit Facility to fund the TelecityGroup acquisition.
Equinix provides global data center offerings 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 40 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 June 30, 2016, we operated or had partner International Business Exchange
®
(“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; Bulgaria, Finland, France, Germany, Ireland, Italy, the Netherlands, Poland, Sweden, Switzerland, Turkey, the United Arab Emirates and the United Kingdom in the Europe, Middle East and Africa (“EMEA”) region; and Australia, China, Hong Kong, Indonesia, Japan and Singapore in the Asia-Pacific region.
Our data centers in 40 markets around the world are 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 that lowers overall cost and increases flexibility. Our focused business model is built 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.
Historically, our market has been served by large telecommunications carriers who have bundled 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. More than 350 companies provide 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 reaches 21 countries with proven operational reliability, improved application performance and network choice, and a highly scalable set of offerings.
Our utilization rate was approximately 82% as of June 30, 2016 and 79% as of June 30, 2015; 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 84% as of June 30, 2016. 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 IBX data 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 IBX data 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 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 any given quarter of the past three years, more than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth. During the three months ended June 30, 2016 and 2015, our largest customer accounted for approximately 3% of our recurring revenues. Our 50 largest customers accounted for approximately 35% and 36% of our recurring revenues for the six months ended June 30, 2016 and 2015, respectively.
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, upon completion of the installation or the 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 expected life of the customer installation. 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 and EMEA revenues are derived primarily from colocation and related interconnection offerings, and our Asia-Pacific revenues are derived primarily from colocation and managed infrastructure offerings.
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 our customers. 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.
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 revenues over time, although we expect each of them to grow in absolute dollars in connection with our growth. 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. 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 may periodically increase as a percentage of revenues as we continue to scale our operations to invest in sales and marketing initiatives to further increase our revenue, including the hiring of additional headcount and new product innovations. General and administrative expenses may also periodically increase as a percentage of revenues as we continue to scale our operations to support our growth.
Real Estate Investment Trust (“REIT”) Conversion
We began operating as a REIT for federal income tax purposes effective January 1, 2015. In May 2015, we received a favorable private letter ruling (“PLR”) from the U.S. Internal Revenue Service (“IRS”) in connection with our conversion to a REIT. As of June 30, 2016, our REIT structure includes all of our data center operations in the U.S., Canada and our historical data center
operations in Europe and Japan. Our data center operations in other jurisdictions have initially been designated as taxable REIT subsidiaries (“TRSs”).
We initially have designated the legal entities acquired in the Bit-isle acquisition as TRSs, which we believe will not impact our qualification for taxation as a REIT. We plan to integrate the data center assets of the Bit-isle business into our REIT structure no later than the first half of 2017.
We initially have designated the legal entities acquired in the TelecityGroup acquisition as TRSs, which we believe will not impact our qualification for taxation as a REIT. We plan to integrate a significant portion of the TelecityGroup businesses into our REIT structure by the end of 2016 and to complete the REIT integration for majority of the remaining TelecityGroup business during the first half of 2017.
As a REIT, we generally are permitted to deduct from federal taxable income the dividends we pay to our stockholders (including, for this purpose, the value of any deemed distribution on account of adjustments to the conversion rate relating to our debt securities that were convertible into our common stock). The income represented by such dividends is not subject to federal taxation at the entity level but is taxed, if at all, at the stockholder level. Nevertheless, the income of our TRSs which hold our U.S. operations that may not be REIT-compliant, are subject, as applicable, to federal and state corporate income tax. Likewise, our foreign subsidiaries 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 TRSs or through qualified REIT subsidiaries (“QRSs”). We are also subject to a separate corporate income tax on gain recognized from a sale of a REIT asset where our basis in the asset is determined by reference to the basis of the asset in the hands of a former C corporation (such as (i) an asset that we held as of the effective date of our REIT election, that is January 1, 2015 or (ii) an asset that we hold in a QRS following the liquidation or other conversion of a former TRS). This built-in-gains tax is generally applicable to any disposition of such an asset during the five-year period (for liquidation or other carryover transaction on or after August 8, 2016, the ten-year period) after the date we first owned the asset as a REIT asset (e.g., January 1, 2015 in the case of REIT assets we held at the time of our REIT conversion), to the extent of the built-in-gain based on the fair market value of such asset on the date we first held the asset as a REIT asset. If we fail to qualify for taxation as a REIT, we will be subject to federal income tax at regular corporate rates. Even if we remain qualified for taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property in addition to taxes owed with respect to our TRSs' operations. In particular, while state income tax regimes often parallel the federal income tax regime for REITs, many states do not completely follow federal rules and some may not follow them at all.
We began paying quarterly cash dividends in 2015 in connection with our conversion to a REIT. On March 23, 2016 and June 15, 2016, we paid quarterly cash dividends of $1.75 per share and on August 3, 2016, we declared a quarterly cash dividend of $1.75 per share, payable on September 14, 2016 to stockholders of record on August 24, 2016. We expect the amount of all 2016 quarterly distributions and the value of the deemed distributions on account of all the adjustments to the conversion rate relating to our matured 4.75% convertible subordinated notes that were made as a result of our first half 2016 distributions will equal or exceed the taxable income we will recognize in 2016.
We continue to monitor our REIT compliance to maintain our qualification for taxation as a REIT. For this and other reasons, as necessary we may convert certain of our data center operations in additional countries into the REIT structure in future periods.
Results of Operations
Our results of operations for the three months ended June 30, 2016 include the results of operations of Bit-isle and TelecityGroup from April 1, 2016. Our results of operations for the six months ended June 30, 2016 include the results of operations of Bit-isle from January 1, 2016 and the results of operations of TelecityGroup from January 15, 2016.
Discontinued Operations
We present the results of operations associated with the TelecityGroup data centers that were divested in July 2016 as discontinued operations in our condensed consolidated statement of operations for the three months ended June 30, 2016. We did not have any discontinued operations activity during 2015.
Three Months Ended June 30, 2016 and 2015
Revenues.
Our revenues for the three months ended June 30, 2016 and 2015 were generated from the following revenue classifications and geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
$
|
393,479
|
|
|
44
|
%
|
|
$
|
353,605
|
|
|
53
|
%
|
|
11
|
%
|
|
12
|
%
|
Non-recurring revenues
|
19,992
|
|
|
2
|
%
|
|
17,842
|
|
|
3
|
%
|
|
12
|
%
|
|
12
|
%
|
|
413,471
|
|
|
46
|
%
|
|
371,447
|
|
|
56
|
%
|
|
11
|
%
|
|
12
|
%
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
281,810
|
|
|
31
|
%
|
|
160,063
|
|
|
24
|
%
|
|
76
|
%
|
|
77
|
%
|
Non-recurring revenues
|
18,799
|
|
|
2
|
%
|
|
13,904
|
|
|
2
|
%
|
|
35
|
%
|
|
36
|
%
|
|
300,609
|
|
|
33
|
%
|
|
173,967
|
|
|
26
|
%
|
|
73
|
%
|
|
74
|
%
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
176,482
|
|
|
20
|
%
|
|
113,023
|
|
|
17
|
%
|
|
56
|
%
|
|
56
|
%
|
Non-recurring revenues
|
9,948
|
|
|
1
|
%
|
|
7,145
|
|
|
1
|
%
|
|
39
|
%
|
|
38
|
%
|
|
186,430
|
|
|
21
|
%
|
|
120,168
|
|
|
18
|
%
|
|
55
|
%
|
|
55
|
%
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
851,771
|
|
|
95
|
%
|
|
626,691
|
|
|
94
|
%
|
|
36
|
%
|
|
37
|
%
|
Non-recurring revenues
|
48,739
|
|
|
5
|
%
|
|
38,891
|
|
|
6
|
%
|
|
25
|
%
|
|
26
|
%
|
|
$
|
900,510
|
|
|
100
|
%
|
|
$
|
665,582
|
|
|
100
|
%
|
|
35
|
%
|
|
36
|
%
|
Americas Revenues.
Our revenues from the U.S., the largest revenue contributor in the Americas region for the period, represented approximately 92% of the regional revenues during the three months ended June 30, 2016 and 2015. Growth in Americas revenues was primarily due to (i) approximately $10.8 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas, Rio de Janeiro, Silicon Valley and Washington, D.C. metro areas and (ii) an increase in orders from both our existing customers and new customers during the period. During the three months ended June 30, 2016, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian real than during the three months ended June 30, 2015, resulting in approximately $3.8 million of net unfavorable foreign currency impact to our Americas revenues during the three months ended June 30, 2016 compared to average exchange rates of the three months ended June 30, 2015. 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 Atlanta, New York, São Paulo, Silicon Valley and Washington D.C. metro areas, which are expected to open during the remainder of 2016 and 2017. 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.
Revenues for our EMEA region for the three months ended June 30, 2016 include $107.2 million of revenues attributable to TelecityGroup, which closed in January 2016. After our acquisition of TelecityGroup, the UK continues to be our largest revenue contributor in the EMEA region, providing 34% of regional revenues for the three months ended June 30, 2016 compared to 39% of regional revenues for the three months ended June 30, 2015 without TelecityGroup. Our EMEA revenue
growth was primarily due to (i) $107.2 million of revenues attributable to TelecityGroup, (ii) approximately $15.7 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, Paris and Zurich metro areas and (iii) an increase in orders from both our existing customers and new customers during the period. During the three months ended June 30, 2016, the impact of foreign currency fluctuations resulted in approximately $2.1 million of net unfavorable foreign currency impact to our EMEA revenues primarily due to a generally stronger U.S. dollar relative to the British pound and Euro during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. 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 Amsterdam, Dublin, Frankfurt, London and Warsaw metro areas, which are expected to open during the remainder of 2016 and 2017, as well as our acquisition of TelecityGroup. 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 as well as our acquisition of TelecityGroup.
Asia-Pacific Revenues.
Revenues for our Asia-Pacific region for the three months ended June 30, 2016 include $37.3 million of revenues attributable to Bit-isle, which closed in November 2015. After our acquisition of Bit-isle, Japan is our largest revenue contributor in the Asia-Pacific region, providing 34% of regional revenues including Bit-isle for the three months ended June 30, 2016 compared to 15% for the three months ended June 30, 2015 without Bit-isle. Excluding revenues attributable to Bit-isle, our revenues from Singapore, which was our largest revenue contributor in the Asia-Pacific region before we acquired Bit-isle, represented approximately 39% and 40%, respectively, of the regional revenues for the three months ended June 30, 2016 and 2015. Our Asia-Pacific revenue growth was primarily due to (i) $37.3 million of revenues attributable to Bit-isle, (ii) approximately $22.9 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Melbourne, Shanghai, Singapore, Sydney and Tokyo metro areas and (iii) an increase in orders from both our existing customers and new customers during the period. For the three months ended June 30, 2016, the impact of foreign currency fluctuations to our Asia-Pacific revenues was not significant when compared to the average exchange rates for the three months ended June 30, 2015. 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 centers and additional expansions currently taking place in the Hong Kong and Sydney metro areas, which are expected to open during the remainder of 2016 and 2017. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts as well as the impact of our acquisition of Bit-isle.
Cost of Revenues.
Our cost of revenues for the three months ended June 30, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
171,014
|
|
|
38
|
%
|
|
$
|
157,890
|
|
|
50
|
%
|
|
8
|
%
|
|
10
|
%
|
EMEA
|
169,969
|
|
|
37
|
%
|
|
86,799
|
|
|
27
|
%
|
|
96
|
%
|
|
96
|
%
|
Asia-Pacific
|
115,984
|
|
|
25
|
%
|
|
71,068
|
|
|
23
|
%
|
|
63
|
%
|
|
62
|
%
|
Total
|
$
|
456,967
|
|
|
100
|
%
|
|
$
|
315,757
|
|
|
100
|
%
|
|
45
|
%
|
|
45
|
%
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
2016
|
|
2015
|
Cost of revenues as a percentage of revenues:
|
|
|
|
Americas
|
41
|
%
|
|
43
|
%
|
EMEA
|
57
|
%
|
|
50
|
%
|
Asia-Pacific
|
62
|
%
|
|
59
|
%
|
Total
|
51
|
%
|
|
47
|
%
|
Americas Cost of Revenues.
Depreciation expense was $59.3 million and $54.3 million for the three months ended June 30, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX expansion activity. In addition to the increase in depreciation expense, the increase in our Americas cost of revenues for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 was primarily due to (i) $4.1 million of higher office expense, utilities, repairs and maintenance, rent and facilities costs in support of our business growth and (ii) $2.3 million of higher costs associated with equipment resale and other services to support customer demand. During the three months ended June 30, 2016, the impact of
foreign currency fluctuations resulted in approximately $2.7 million of net favorable foreign currency impact to our Americas cost of revenues primarily due to a generally stronger U.S. dollar relative to the Brazilian real and Canadian dollar during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. We expect Americas cost of revenues to increase as we continue to grow our business.
EMEA Cost of Revenues.
Cost of revenues for our EMEA region for the three months ended June 30, 2016 includes $72.7 million of cost of revenues attributable to TelecityGroup, which closed in January 2016. Excluding cost of revenues attributable to TelecityGroup, EMEA cost of revenues was $97.3 million for the three months ended June 30, 2016 compared to $86.8 million for the three months ended June 30, 2015. Depreciation expense, excluding TelecityGroup, was $26.6 million and $23.7 million for the three months ended June 30, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding the impact of our acquisition of TelecityGroup, the remaining increase in our EMEA cost of revenues was primarily due to (i) $5.3 million of higher consulting services, utilities and repairs and maintenance costs in support of our business growth and (ii) $1.8 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (574 EMEA cost of revenues employees, as of June 30, 2016 versus 508 as of June 30, 2015). For the three months ended June 30, 2016, the impact of foreign currency fluctuations to our EMEA cost of revenues was not significant when compared to the average exchange rates for the three months ended June 30, 2015. We expect EMEA cost of revenues to increase as we continue to grow our business and as a result of our acquisition of TelecityGroup.
Asia-Pacific Cost of Revenues.
Cost of revenues for our Asia-Pacific region for the three months ended June 30, 2016 includes $30.2 million of cost of revenues attributable to Bit-isle, which closed in November 2015. Excluding cost of revenues attributable to Bit-isle, Asia-Pacific cost of revenues was $85.8 million for the three months ended June 30, 2016 compared to $71.1 million for the three months ended June 30, 2015, primarily due to an increase in depreciation expense. Depreciation expense, excluding Bit-isle, was $37.0 million and $29.2 million for the three months ended June 30, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding the impact of our acquisition of Bit-isle, the remaining increase in our Asia-Pacific cost of revenue was primarily due to $5.7 million of higher utilities, repair and maintenance, rent and facility costs. For the three months ended June 30, 2016, 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 June 30, 2015. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business, including from the impact of our acquisition of Bit-isle.
Sales and Marketing Expenses
. Our sales and marketing expenses for the three months ended June 30, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
57,256
|
|
|
53
|
%
|
|
$
|
50,415
|
|
|
62
|
%
|
|
14
|
%
|
|
14
|
%
|
EMEA
|
34,203
|
|
|
32
|
%
|
|
17,835
|
|
|
22
|
%
|
|
92
|
%
|
|
94
|
%
|
Asia-Pacific
|
16,373
|
|
|
15
|
%
|
|
12,998
|
|
|
16
|
%
|
|
26
|
%
|
|
25
|
%
|
Total
|
$
|
107,832
|
|
|
100
|
%
|
|
$
|
81,248
|
|
|
100
|
%
|
|
33
|
%
|
|
34
|
%
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
2016
|
|
2015
|
Sales and marketing expenses as a percentage of revenues:
|
|
|
|
Americas
|
14
|
%
|
|
14
|
%
|
EMEA
|
11
|
%
|
|
10
|
%
|
Asia-Pacific
|
9
|
%
|
|
11
|
%
|
Total
|
12
|
%
|
|
12
|
%
|
Americas Sales and Marketing Expenses.
The increase in our Americas sales and marketing expenses was primarily due to $4.0 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (529 Americas sales and marketing employees, as of June 30, 2016 versus 471 as of June 30, 2015) and $2.2 million of higher advertising, promotion, consulting and travel and entertainment expenses to support our growth. During the three months ended June 30, 2016, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates during the three months ended June 30, 2015. 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. 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.
EMEA Sales and Marketing Expenses.
Sales and marketing expenses for our EMEA region for the three months ended June 30, 2016 included $13.4 million attributable to TelecityGroup, which closed in January 2016. Excluding the impact of TelecityGroup, our EMEA sales and marketing expenses were $20.8 million for the three months ended June 30, 2016 compared to $17.8 million for the three months ended June 30, 2015. The increase was primarily due to $1.4 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (246 EMEA sales and marketing employees, excluding TelecityGroup employees, as of June 30, 2016 versus 212 as of June 30, 2015) as well as higher advertising and promotion expenses. For the three months ended June 30, 2016, the impact of foreign currency fluctuations to EMEA sales and marketing expenses was not significant when compared to the average exchange rates for the three months ended June 30, 2015. 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. We expect our EMEA sales and marketing expenses to increase as a result of the TelecityGroup acquisition. Although we anticipate that we will continue to invest in EMEA sales and marketing initiatives, including the integration of TelecityGroup, we believe our EMEA sales and marketing expenses as a percentage of revenues will ultimately decrease as we continue to grow our business.
Asia-Pacific Sales and Marketing Expenses.
Sales and marketing expenses for our Asia-Pacific region for the three months ended June 30, 2016 included $4.0 million attributable to Bit-isle, which closed in November 2015. Excluding the impact of Bit-isle, our Asia-Pacific sales and marketing expenses did not materially change during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. For the three months ended June 30, 2016, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates of the three months ended June 30, 2015. 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. We expect our Asia-Pacific sales and marketing expenses to increase as a result of the Bit-isle acquisition. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, including the integration of Bit-isle, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will ultimately decrease as we continue to grow our business.
General and Administrative Expenses.
Our general and administrative expenses for the three months ended June 30, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
96,837
|
|
|
57
|
%
|
|
$
|
86,831
|
|
|
73
|
%
|
|
12
|
%
|
|
12
|
%
|
EMEA
|
52,971
|
|
|
31
|
%
|
|
22,023
|
|
|
18
|
%
|
|
141
|
%
|
|
145
|
%
|
Asia-Pacific
|
18,654
|
|
|
12
|
%
|
|
10,724
|
|
|
9
|
%
|
|
74
|
%
|
|
75
|
%
|
Total
|
$
|
168,462
|
|
|
100
|
%
|
|
$
|
119,578
|
|
|
100
|
%
|
|
41
|
%
|
|
42
|
%
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
2016
|
|
2015
|
General and administrative expenses as a percentage of revenues:
|
|
|
|
Americas
|
23
|
%
|
|
23
|
%
|
EMEA
|
18
|
%
|
|
13
|
%
|
Asia-Pacific
|
10
|
%
|
|
9
|
%
|
Total
|
19
|
%
|
|
18
|
%
|
Americas General and Administrative Expenses.
The increase in our Americas general and administrative expenses was primarily due to (i) $5.3 million of higher compensation costs, including general salaries, bonuses, stock-based compensation, and headcount growth (891 Americas general and administrative employees as of June 30, 2016 versus 764 as of June 30, 2015) and (ii) $4.2 million of higher depreciation expense associated with certain systems to improve our quote to order and billing processes and other systems to support the integration and growth of our business. During the three months ended June 30, 2016, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared
to average exchange rates for the three months ended June 30, 2015. 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, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including these investments in our back office systems and maintaining our REIT qualification; however, as a percentage of revenues, we generally expect them to decrease.
EMEA General and Administrative Expenses.
General and administrative expenses for our EMEA region for the three months ended June 30, 2016 included $21.9 million attributable to TelecityGroup, which closed in January 2016. Excluding the impact of TelecityGroup, our EMEA general and administrative expenses were $31.1 million for the three months ended June 30, 2016 compared to $22.0 million for the three months ended June 30, 2015. Excluding the impact of TelecityGroup, the increase was primarily due to (i) $5.0 million of higher consulting and other professional services and travel costs to support the integration of TelecityGroup, (ii) $1.6 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (483 EMEA general and administrative employees, excluding TelecityGroup employees, as of June 30, 2016 versus 376 as of June 30, 2015) and (iii) $1.6 million of higher depreciation expense associated with certain systems to improve our quote to order and billing processes and other systems to support the integration and growth of our business. For the three months ended June 30, 2016, the impact of foreign currency fluctuations to EMEA general and administrative expenses was not significant when compared to the average exchange rates for the three months ended June 30, 2015. 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, as well as the integration of TelecityGroup; however, as a percentage of revenues, we generally expect them to decrease.
Asia-Pacific General and Administrative Expenses.
General and administrative expenses for our Asia-Pacific region for the three months ended June 30, 2016 included $4.0 million attributable to Bit-isle, which closed in November 2015. Excluding the impact of Bit-isle, our Asia-Pacific general and administrative expenses were $14.7 million for the three months ended June 30, 2016 compared to $10.7 million for the three months ended June 30, 2015. Excluding the impact of Bit-isle, the increase was primarily due to $2.9 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (286 Asia-Pacific general and administrative employees, excluding Bit-isle employees, as of June 30, 2016 versus 247 as of June 30, 2015). For the three months ended June 30, 2016, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average exchange rates of the three months ended June 30, 2015. Going forward, although we are carefully monitoring our spending, we expect Asia-Pacific general and administrative expenses to increase as a result of our acquisition and integration of Bit-isle and as we continue to scale or operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease.
Acquisition Costs.
During the three months ended June 30, 2016, we recorded acquisition costs totaling $15.6 million primarily in the EMEA region. During the three months ended June 30, 2015, we recorded acquisition costs totaling $9.9 million primarily in the Americas and EMEA regions.
Income from Continuing Operations.
Our income from continuing operations for the three months ended June 30, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
87,100
|
|
|
58
|
%
|
|
$
|
77,653
|
|
|
56
|
%
|
|
12
|
%
|
|
12
|
%
|
EMEA
|
29,096
|
|
|
19
|
%
|
|
36,110
|
|
|
26
|
%
|
|
(19
|
)%
|
|
(19
|
)%
|
Asia-Pacific
|
35,459
|
|
|
23
|
%
|
|
25,370
|
|
|
18
|
%
|
|
40
|
%
|
|
42
|
%
|
Total
|
$
|
151,655
|
|
|
100
|
%
|
|
$
|
139,133
|
|
|
100
|
%
|
|
9
|
%
|
|
10
|
%
|
Americas Income from Continuing Operations.
The increase in our Americas income from continuing operations was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above, partially offset by higher cost of revenues and operating expenses as a percentage of revenues primarily attributable to higher compensation and other headcount related expenses to support our growth. The impact of foreign currency fluctuations on our Americas income from continuing operations for the three months ended June 30, 2016 was not significant when compared to average exchange rates of the three months ended June 30, 2015.
EMEA Income from Continuing Operations.
The decrease in our EMEA income from continuing operations was primarily due to acquisition and integration costs incurred in connection with our acquisition of TelecityGroup, which closed in January 2016, as well as the increased depreciation and amortization created from the purchase accounting for TelecityGroup. The impact of foreign currency fluctuations on our EMEA loss from continuing operations for the three months ended June 30, 2016 was not significant when compared to average exchange rates of the three months ended June 30, 2015.
Asia-Pacific Income from Continuing Operations.
The increase in our Asia-Pacific income from continuing operations was primarily due to higher revenues as a result of our acquisition of Bit-isle, which closed in November 2015, as well as our IBX data center expansion activity and organic growth as described above, partially offset by higher cost of revenues and operating expenses as a percentage of revenues primarily attributable to our acquisition of Bit-isle as well as higher compensation and other headcount related expenses and higher professional fees to support our growth. The impact of foreign currency fluctuations on our Asia-Pacific income from continuing operations for the three months ended June 30, 2016 was not significant when compared to average exchange rates of the three months ended June 30, 2015.
Interest Income.
Interest income was $841,000 and $921,000, respectively, for the three months ended June 30, 2016 and 2015. The average annualized yield for the three months ended June 30, 2016 was 0.46% versus 0.22% for the three months ended June 30, 2015. We expect our interest income to remain at these low levels for the foreseeable future due to lower invested balances and a portfolio more weighted towards short-term U.S. government securities.
Interest Expense.
Interest expense increased to $100.3 million for the three months ended June 30, 2016 from $74.5 million for the three months ended June 30, 2015. This increase in interest expense was primarily due to the impact of our $1.1 billion of senior notes issued in December 2015, $645.2 million outstanding seven year term loans we borrowed in January 2016 and $459.8 million of an outstanding bridge term loan we borrowed to finance our acquisition of Bit-isle, which closed in November 2015, as well as additional financings such as various capital lease and other financing obligations to support our expansion projects. During the three months ended June 30, 2016 and 2015, we capitalized
$3.2 million
and $1.7 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 $1.1 billion senior notes offering in December 2015, $645.2 million of seven year term loans we borrowed in January 2016 and $459.8 million of an outstanding bridge term loan which we expect to refinance in 2016. We expect to incur additional indebtedness to support our growth and acquisition opportunities, such as the Bit-isle and TelecityGroup acquisitions, resulting in higher interest expense.
Other Income (Expense).
We recorded net income of $1.6 million and net income of $1.4 million, respectively, of other income (expense), for the three months ended June 30, 2016 and 2015, primarily due to foreign currency exchange gains and losses during the periods.
Loss on debt extinguishment.
During the three months ended June 30, 2016, we recorded $605,000 loss on debt extinguishment as a result of the prepayment and termination of our 2012 and 2013 Brazil financings. We did not have loss on debt extinguishment during the three months ended June 30, 2015.
Income Taxes.
Effective January 1, 2015, we have operated as a REIT for federal income tax purposes. As a REIT, we are generally not subject to federal income taxes on the taxable income distributed to our stockholders. We intend to distribute and have distributed the entire taxable income generated by the operations of our REIT and its QRSs for the tax years ended December 31, 2016 and December 31, 2015, respectively. As such, no provision for U.S. income taxes for the REIT and its QRSs has been included in the accompanying condensed consolidated financial statements for the three months ended June 30, 2016 and 2015.
We have made TRS elections for some of our subsidiaries in and outside the U.S. In general, a TRS may provide services that would otherwise be considered impermissible for REITs to provide and may hold assets that REITs cannot hold directly. U.S. income taxes for the TRS entities located in the U.S. and foreign income taxes for our foreign operations regardless of whether the foreign operations are operated as a QRS or TRS were accrued, as necessary, for the three months ended June 30, 2016 and 2015.
For the three months ended June 30, 2016 and 2015, we recorded $13.8 million and $7.5 million of income tax expense, respectively. Our effective tax rates were 26.0% and 11.2%, respectively, for the three months ended June 30, 2016 and 2015. The increase in the effective tax rate for the three months ended June 30, 2016 as compared to the same period in 2015 is primarily due to a much lower profit before tax for the period, attributable to the non-tax deductible cost related to the TelecityGroup acquisition and an increase in valuation allowance.
Income from Discontinued Operations.
Our net income from discontinued operations was $5.4 million for the three months ended June 30, 2016. We did not have discontinued operations during the three months ended June 30, 2015.
Adjusted EBITDA
. Adjusted EBITDA is a key factor in how we assess the operating performance of our segments and develop regional growth strategies such as IBX data center expansion decisions. We define adjusted EBITDA as income or loss from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges, acquisition costs and gains on asset sales. See "Non-GAAP Financial Measures" below for more information about adjusted EBITDA and a reconciliation of adjusted EBITDA to the most directly comparable GAAP measure. Our adjusted EBITDA for the three months ended June 30, 2016 and 2015 was split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
195,028
|
|
|
46
|
%
|
|
$
|
170,886
|
|
|
55
|
%
|
|
14
|
%
|
|
15
|
%
|
EMEA
|
133,455
|
|
|
32
|
%
|
|
79,533
|
|
|
25
|
%
|
|
68
|
%
|
|
68
|
%
|
Asia-Pacific
|
91,808
|
|
|
22
|
%
|
|
60,843
|
|
|
20
|
%
|
|
51
|
%
|
|
51
|
%
|
Total
|
$
|
420,291
|
|
|
100
|
%
|
|
$
|
311,262
|
|
|
100
|
%
|
|
35
|
%
|
|
36
|
%
|
Americas Adjusted EBITDA.
The increase in our Americas adjusted EBITDA was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above. The impact of foreign currency fluctuations on our Americas adjusted EBITDA for the three months ended June 30, 2016 was not significant when compared to average exchange rates of the three months ended June 30, 2015.
EMEA Adjusted EBITDA.
Adjusted EBITDA for our EMEA region includes $51.9 million of adjusted EBITDA attributable to our acquisition of TelecityGroup, which closed in January 2016. Excluding adjusted EBITDA attributable to TelecityGroup, our EMEA adjusted EBITDA did not materially change during the three months ended June 30, 2016 compared to the three months ended June 30, 2015. The impact of foreign currency fluctuations on our EMEA adjusted EBITDA for the three months ended June 30, 2016 was not significant when compared to average exchange rates of the three months ended June 30, 2015.
Asia-Pacific Adjusted EBITDA.
Adjusted EBITDA for our Asia-Pacific region includes $12.1 million of adjusted EBITDA attributable to our acquisition of Bit-isle, which closed in November 2015. Excluding adjusted EBITDA attributable to Bit-isle, the increase in our Asia-Pacific adjusted EBITDA was primarily due to higher revenues as result of our IBX data center expansion activity and organic growth as described above. The impact of foreign currency fluctuations on our Asia-Pacific adjusted EBITDA for the three months ended June 30, 2016 was not significant when compared to average exchange rates of the three months ended June 30, 2015.
Six Months Ended June 30, 2016 and 2015
Revenues.
Our revenues for the six months ended June 30, 2016 and 2015 were generated from the following revenue classifications and geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
$
|
773,635
|
|
|
44
|
%
|
|
$
|
700,659
|
|
|
53
|
%
|
|
10
|
%
|
|
12
|
%
|
Non-recurring revenues
|
44,230
|
|
|
3
|
%
|
|
34,757
|
|
|
3
|
%
|
|
27
|
%
|
|
28
|
%
|
|
817,865
|
|
|
47
|
%
|
|
735,416
|
|
|
56
|
%
|
|
11
|
%
|
|
13
|
%
|
EMEA:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
535,191
|
|
|
31
|
%
|
|
313,487
|
|
|
24
|
%
|
|
71
|
%
|
|
73
|
%
|
Non-recurring revenues
|
33,274
|
|
|
2
|
%
|
|
25,103
|
|
|
2
|
%
|
|
33
|
%
|
|
35
|
%
|
|
568,465
|
|
|
33
|
%
|
|
338,590
|
|
|
26
|
%
|
|
68
|
%
|
|
70
|
%
|
Asia-Pacific:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
340,039
|
|
|
19
|
%
|
|
222,202
|
|
|
17
|
%
|
|
53
|
%
|
|
55
|
%
|
Non-recurring revenues
|
18,297
|
|
|
1
|
%
|
|
12,548
|
|
|
1
|
%
|
|
46
|
%
|
|
47
|
%
|
|
358,336
|
|
|
20
|
%
|
|
234,750
|
|
|
18
|
%
|
|
53
|
%
|
|
54
|
%
|
Total:
|
|
|
|
|
|
|
|
|
|
|
|
Recurring revenues
|
1,648,865
|
|
|
94
|
%
|
|
1,236,348
|
|
|
94
|
%
|
|
33
|
%
|
|
35
|
%
|
Non-recurring revenues
|
95,801
|
|
|
6
|
%
|
|
72,408
|
|
|
6
|
%
|
|
32
|
%
|
|
34
|
%
|
|
$
|
1,744,666
|
|
|
100
|
%
|
|
$
|
1,308,756
|
|
|
100
|
%
|
|
33
|
%
|
|
35
|
%
|
Americas Revenues.
Our revenues from the U.S., the largest revenue contributor in the Americas region for the period, represented approximately 93% and 92%, respectively, of the regional revenues during the six months ended June 30, 2016 and 2015. Growth in Americas revenues was primarily due to (i) approximately $20.9 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Dallas, Rio de Janeiro, Silicon Valley and Washington, D.C. metro areas and (ii) an increase in orders from both our existing customers and new customers during the period. During the six months ended June 30, 2016, the U.S. dollar was generally stronger relative to the Canadian dollar and Brazilian real than during the six months ended June 30, 2015, resulting in approximately $12.1 million of net unfavorable foreign currency impact to our Americas revenues during the six months ended June 30, 2016 compared to average exchange rates during the six months ended June 30, 2015. 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 Atlanta, New York, São Paulo, Silicon Valley and Washington D.C. metro areas, which are expected to open during the remainder of 2016 and 2017. 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.
Revenues for our EMEA region for the six months ended June 30, 2016 include $191.7 million of revenues attributable to TelecityGroup, which closed in January 2016. After our acquisition of TelecityGroup, the UK continues to be our largest revenue contributor in the EMEA region, providing 34% of regional revenues for the six months ended June 30, 2016 compared to 38% of regional revenues for the six months ended June 30, 2015 without TelecityGroup. Our EMEA revenue growth was primarily due to (i) $191.7 million of revenues attributable to TelecityGroup, (ii) approximately $29.7 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, Paris and Zurich metro areas and (iii) an increase in orders from both our existing customers and new customers during the period. During the six months ended June 30, 2016, the impact of foreign currency fluctuations resulted in approximately $8.6 million of net unfavorable foreign currency impact to our EMEA revenues primarily due to a generally stronger U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. 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 Amsterdam, Dublin, Frankfurt, London, and Warsaw metro areas, which are expected to open during the remainder of 2016 and 2017, as well as our acquisition of TelecityGroup. 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 as well as our acquisition of TelecityGroup.
Asia-Pacific Revenues.
Revenues for our Asia-Pacific region for the six months ended June 30, 2016 include $71.5 million of revenues attributable to Bit-isle, which closed in November 2015. After our acquisition of Bit-isle, Japan is our largest revenue contributor in the Asia-Pacific region, providing 34% of regional revenues including Bit-isle for the six months ended June 30, 2016 compared to 15% for the six months ended June 30, 2015 without Bit-isle. Excluding revenues attributable to Bit-isle, our revenues from Singapore, which was our largest revenue contributor in the Asia-Pacific region before we acquired Bit-isle, represented approximately 38% and 40%, respectively, of the regional revenues for the six months ended June 30, 2016 and 2015. Our Asia-Pacific revenue growth was primarily due to (i) $71.5 million of revenues attributable to Bit-isle, (ii) approximately $40.2 million of revenue generated from our recently-opened IBX data center expansions in the Hong Kong, Melbourne, Shanghai, Singapore, Sydney and Tokyo metro areas and (iii) an increase in orders from both our existing customers and new customers during the period. During the six months ended June 30, 2016, the U.S. dollar was generally stronger relative to the Australian and Singapore dollars and Japanese Yen than during the six months ended June 30, 2015, resulting in approximately $3.6 million of net unfavorable foreign currency impact to our Asia-Pacific revenues during the six months ended June 30, 2016 when compared to average exchange rates during the six months ended June 30, 2015. 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 centers and additional expansions currently taking place in the Hong Kong and Sydney metro areas, which are expected to open during the remainder of 2016 and 2017. Our estimates of future revenue growth take into account expected changes in recurring revenues attributed to customer bookings, customer churn or changes or amendments to customers’ contracts as well as the impact of our acquisition of Bit-isle.
Cost of Revenues.
Our cost of revenues for the six months ended June 30, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
341,140
|
|
|
39
|
%
|
|
$
|
308,259
|
|
|
50
|
%
|
|
11
|
%
|
|
14
|
%
|
EMEA
|
321,731
|
|
|
36
|
%
|
|
168,015
|
|
|
28
|
%
|
|
91
|
%
|
|
94
|
%
|
Asia-Pacific
|
221,776
|
|
|
25
|
%
|
|
137,796
|
|
|
22
|
%
|
|
61
|
%
|
|
61
|
%
|
Total
|
$
|
884,647
|
|
|
100
|
%
|
|
$
|
614,070
|
|
|
100
|
%
|
|
44
|
%
|
|
46
|
%
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
Cost of revenues as a percentage of revenues:
|
|
|
|
Americas
|
42
|
%
|
|
42
|
%
|
EMEA
|
57
|
%
|
|
50
|
%
|
Asia-Pacific
|
62
|
%
|
|
59
|
%
|
Total
|
51
|
%
|
|
47
|
%
|
Americas Cost of Revenues.
Depreciation expense was $118.1 million and $107.8 million for the six months ended June 30, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX expansion activity. In addition to the increase in depreciation expense, the increase in our Americas cost of revenues for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 was primarily due to (i) $11.1 million of higher utilities, rent and facilities costs, office expense, consulting, and repairs and maintenance in support of our business growth, (ii) $7.5 million of higher costs associated with equipment resales to support growth of our non-recurring revenues and (iii) $2.5 million of higher compensation costs, including sales compensation, general salaries, bonuses and stock-based compensation. During the six months ended June 30, 2016, the impact of foreign currency fluctuations resulted in approximately $9.1 million of net favorable foreign currency impact to our Americas cost of revenues primarily due to a generally stronger U.S. dollar relative to the Brazilian real and Canadian dollar during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. We expect Americas cost of revenues to increase as we continue to grow our business.
EMEA Cost of Revenues.
Cost of revenues for our EMEA region for the six months ended June 30, 2016 includes $133.3 million of cost of revenues attributable to TelecityGroup, which closed in January 2016. Excluding cost of revenues attributable to TelecityGroup, EMEA cost of revenues was $188.4 million for the six months ended June 30, 2016 compared to $168.0 million for the six months ended June 30, 2015. Depreciation expense, excluding TelecityGroup, was $52.0 million and $45.8 million for the six months ended June 30, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX
data center expansion activity. Excluding the impact of our acquisition of TelecityGroup, the remaining increase in our EMEA cost of revenues was primarily due to (i) $10.1 million of higher utilities, consulting, and repairs and maintenance costs in support of our business growth and (ii) $2.1 million of higher compensation costs, including sales compensation, general salaries, bonuses and stock-based compensation and headcount growth (574 EMEA cost of revenues employees as of June 30, 2016 versus 508 as of June 30, 2015) . During the six months ended June 30, 2016 the impact of foreign currency fluctuations to our EMEA cost of revenues resulted in approximately $3.6 million of net favorable foreign currency impact to our EMEA cost of revenues primarily due to a generally stronger U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. We expect EMEA cost of revenues to increase as we continue to grow our business and as a result of our acquisition of TelecityGroup.
Asia-Pacific Cost of Revenues.
Cost of revenues for our Asia-Pacific region for the six months ended June 30, 2016 includes $57.2 million of cost of revenues attributable to Bit-isle, which closed in November 2015. Excluding cost of revenues attributable to Bit-isle, Asia-Pacific cost of revenues was $164.6 million for the six months ended June 30, 2016 compared to $137.8 million for the six months ended June 30, 2015, primarily due to an increase in depreciation expense. Depreciation expense, excluding Bit-isle, was $71.8 million and $56.4 million for the six months ended June 30, 2016 and 2015, respectively. The growth in depreciation expense was primarily due to our IBX data center expansion activity. Excluding the impact of our acquisition of Bit-isle, the remaining increase in our Asia-Pacific cost of revenues was primarily due to (i) $7.6 million of higher utilities, rent, facility costs, consulting, and repairs and maintenance costs in support of our business growth and (ii) $1.8 million of higher compensation costs, including sales compensation, general salaries, bonuses and stock-based compensation and headcount growth (407 Asia-Pacific cost of revenues employees as of June 30, 2016 versus 376 as of June 30, 2015) . For the six months ended June 30, 2016, the impact of foreign currency fluctuations to our Asia-Pacific cost of revenues was not significant when compared to average exchange rates of the six months ended June 30, 2015. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business, including from the impact of our acquisition of Bit-isle.
Sales and Marketing Expenses
. Our sales and marketing expenses for the six months ended June 30, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
115,009
|
|
|
53
|
%
|
|
$
|
99,460
|
|
|
62
|
%
|
|
16
|
%
|
|
17
|
%
|
EMEA
|
66,054
|
|
|
31
|
%
|
|
35,080
|
|
|
22
|
%
|
|
88
|
%
|
|
91
|
%
|
Asia-Pacific
|
33,359
|
|
|
16
|
%
|
|
25,324
|
|
|
16
|
%
|
|
32
|
%
|
|
33
|
%
|
Total
|
$
|
214,422
|
|
|
100
|
%
|
|
$
|
159,864
|
|
|
100
|
%
|
|
34
|
%
|
|
36
|
%
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
Sales and marketing expenses as a percentage of revenues:
|
|
|
|
Americas
|
14
|
%
|
|
14
|
%
|
EMEA
|
12
|
%
|
|
10
|
%
|
Asia-Pacific
|
9
|
%
|
|
11
|
%
|
Total
|
12
|
%
|
|
12
|
%
|
Americas Sales and Marketing Expenses.
The increase in our Americas sales and marketing expenses was primarily due to $9.8 million of higher compensation costs, including sales compensation, general salaries, bonuses and stock-based compensation and headcount growth (529 Americas sales and marketing employees as of June 30, 2016 versus 471 as of June 30, 2015) and $5.2 million of higher advertising, promotion, consulting and travel and entertainment expenses to support our growth. During the six months ended June 30, 2016, the impact of foreign currency fluctuations to our Americas sales and marketing expenses was not significant when compared to average exchange rates during the six months ended June 30, 2015. 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. 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.
EMEA Sales and Marketing Expenses.
Sales and marketing expenses for our EMEA region for the six months ended June 30, 2016 included $24.7 million attributable to TelecityGroup, which closed in January 2016. Excluding the impact of TelecityGroup, our EMEA sales and marketing expenses were $41.4 million for the six months ended June 30, 2016 compared to $35.1 million for the six months ended June 30, 2015. The increase was primarily due to (i) $3.6 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (246 EMEA sales and marketing employees, excluding TelecityGroup employees, as of June 30, 2016 versus 212 as of June 30, 2015) and (ii) $2.0 million of higher advertising, promotion, consulting, travel, recruiting and training expenses to support our growth. For the six months ended June 30, 2016, the impact of foreign currency fluctuations to EMEA sales and marketing expenses was not significant when compared to the average exchange rates for the six months ended June 30, 2015. 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. We expect our EMEA sales and marketing expenses to increase as a result of the TelecityGroup acquisition. Although we anticipate we will continue to invest in EMEA sales and marketing initiatives, including the integration of TelecityGroup, we believe our EMEA sales and marketing expenses as a percentage of revenues will ultimately decrease as we continue to grow our business.
Asia-Pacific Sales and Marketing Expenses.
Sales and marketing expenses for our Asia-Pacific region for the six months ended June 30, 2016 included $7.5 million attributable to Bit-isle, which closed in November 2015. Excluding the impact of Bit-isle, our Asia-Pacific sales and marketing expenses did not materially change during the six months ended June 30, 2016 compared to the six months ended June 30, 2015. For the six months ended June 30, 2016, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average exchange rates for the six months ended June 30, 2015. 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. We expect our Asia-Pacific sales and marketing expenses to increase as a result of the Bit-isle acquisition. Although we anticipate that we will continue to invest in Asia-Pacific sales and marketing initiatives, including the integration of Bit-isle, we believe our Asia-Pacific sales and marketing expenses as a percentage of revenues will ultimately decrease as we continue to grow our business.
General and Administrative Expenses.
Our general and administrative expenses for the six months ended June 30, 2016 and 2015 were split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
189,941
|
|
|
57
|
%
|
|
$
|
168,954
|
|
|
73
|
%
|
|
12
|
%
|
|
13
|
%
|
EMEA
|
108,448
|
|
|
32
|
%
|
|
42,454
|
|
|
18
|
%
|
|
155
|
%
|
|
160
|
%
|
Asia-Pacific
|
35,977
|
|
|
11
|
%
|
|
21,810
|
|
|
9
|
%
|
|
65
|
%
|
|
67
|
%
|
Total
|
$
|
334,366
|
|
|
100
|
%
|
|
$
|
233,218
|
|
|
100
|
%
|
|
43
|
%
|
|
45
|
%
|
|
|
|
|
|
|
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
General and administrative expenses as a percentage of revenues:
|
|
|
|
Americas
|
23
|
%
|
|
23
|
%
|
EMEA
|
19
|
%
|
|
13
|
%
|
Asia-Pacific
|
10
|
%
|
|
9
|
%
|
Total
|
19
|
%
|
|
18
|
%
|
Americas General and Administrative Expenses.
The increase in our Americas general and administrative expenses was primarily due to (i) $9.1 million of higher compensation costs, including general salaries, bonuses, stock-based compensation, and headcount growth (891 Americas general and administrative employees as of June 30, 2016 versus 764 as of June 30, 2015), (ii) $8.1 million of higher depreciation expense associated with certain systems to improve our quote to order and billing processes and other systems to support the integration and growth of our business and (iii) $2.3 million of higher office expense to support our growth. During the six months ended June 30, 2016, the impact of foreign currency fluctuations to our Americas general and administrative expenses was not significant when compared to average exchange rates for the six months ended June 30, 2015. 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, we expect Americas general and administrative expenses to increase as we continue to further scale our operations to support our growth, including these investments in our back office systems and maintaining our REIT qualification; however, as a percentage of revenues, we generally expect them to decrease.
EMEA General and Administrative Expenses.
General and administrative expenses for our EMEA region for the six months ended June 30, 2016 included $40.7 million attributable to TelecityGroup, which closed in January 2016. Excluding the impact of TelecityGroup, our EMEA general and administrative expenses were $67.7 million for the six months ended June 30, 2016 compared to $42.5 million for the six months ended June 30, 2015. Excluding the impact of TelecityGroup, the increase was primarily due to (i) $13.9 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (483 EMEA general and administrative employees, excluding TelecityGroup employees, as of June 30, 2016 versus 376 as of June 30, 2015), (ii) $7.1 million of higher outside services to support the integration of TelecityGroup and (iii) $2.6 million of higher depreciation expense associated with certain systems to improve our quote to order and billing processes and other systems to support the integration and growth of our business. For the six months ended June 30, 2016, the impact of foreign currency fluctuations to EMEA general and administrative expenses was not significant when compared to the average exchange rates for the six months ended June 30, 2015. 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, as well as integration of TelecityGroup; however, as a percentage of revenues, we generally expect them to decrease.
Asia-Pacific General and Administrative Expenses.
General and administrative expenses for our Asia-Pacific region for the six months ended June 30, 2016 included $8.2 million attributable to Bit-isle, which closed in November 2015. Excluding the impact of Bit-isle, our Asia-Pacific general and administrative expenses were $27.8 million for the six months ended June 30, 2016 compared to $21.8 million for the six months ended June 30, 2015. Excluding the impact of Bit-isle, the increase was primarily due to $4.8 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation and headcount growth (286 Asia-Pacific general and administrative employees, excluding Bit-isle employees, as of June 30, 2016 versus 247 as of June 30, 2015). For the six months ended June 30, 2016, 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 six months ended June 30, 2015. Going forward, although we are carefully monitoring our spending, we expect Asia-Pacific general and administrative expenses to increase as a result of our acquisition and integration of Bit-isle and 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 six months ended June 30, 2016, we recorded acquisition costs totaling $52.1 million primarily in the EMEA region. During the six months ended June 30, 2015, we recorded acquisition costs totaling $11.0 million primarily in the EMEA and Americas regions.
Income from Continuing Operations.
Our income from continuing operations for the six months ended June 30, 2016 and 2015 was split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
175,639
|
|
|
67
|
%
|
|
$
|
159,119
|
|
|
55
|
%
|
|
10
|
%
|
|
11
|
%
|
EMEA
|
21,677
|
|
|
8
|
%
|
|
81,651
|
|
|
28
|
%
|
|
(73
|
)%
|
|
(71
|
)%
|
Asia-Pacific
|
67,027
|
|
|
25
|
%
|
|
49,812
|
|
|
17
|
%
|
|
35
|
%
|
|
40
|
%
|
Total
|
$
|
264,343
|
|
|
100
|
%
|
|
$
|
290,582
|
|
|
100
|
%
|
|
(9
|
)%
|
|
(7
|
)%
|
Americas Income from Continuing Operations.
The increase in our Americas income from continuing operations was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above, partially offset by higher cost of revenues and operating expenses as a percentage of revenues primarily attributable to higher compensation and other headcount related expenses to support our growth. The impact of foreign currency fluctuations on our Americas income from continuing operations for the six months ended June 30, 2016 was not significant when compared to average exchange rates of the six months ended June 30, 2015.
EMEA Income from Continuing Operations.
The decrease in our EMEA income from continuing operations was primarily due to acquisition and integration costs incurred in connection with our acquisition of TelecityGroup, which closed in January 2016, as well as the increased depreciation and amortization created from the purchase accounting for TelecityGroup. During the six months ended June 30, 2016, the impact of foreign currency fluctuations resulted in approximately $2.3 million of net
unfavorable foreign currency impact to our EMEA income from continuing operations primarily due to a generally stronger U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
Asia-Pacific Income from Continuing Operations.
The increase in our Asia-Pacific income from continuing operations was primarily due to higher revenues as a result of our acquisition of Bit-isle, which closed in November 2015, as well as our IBX data center expansion activity and organic growth as described above, partially offset by higher cost of revenues and operating expenses as a percentage of revenues primarily attributable to our acquisition of Bit-isle as well as higher compensation and other headcount related expenses and higher professional fees to support our growth. During the six months ended June 30, 2016, the U.S. dollar was generally stronger relative to the Australian and Singapore dollars and Japanese Yen than during the six months ended June 30, 2015, resulting in approximately $2.6 million of net unfavorable foreign currency impact to our Asia-Pacific income from continuing operations during the six months ended June 30, 2016 when compared to average exchange rates during the six months ended June 30, 2015.
Interest Income.
Interest income was $1.8 million and $1.4 million, respectively, for the six months ended June 30, 2016 and 2015. The average annualized yield for the six months ended June 30, 2016 was 0.33% versus 0.20% for the six months ended June 30, 2015. We expect our interest income to remain at these low levels for the foreseeable future due to lower invested balances and a portfolio more weighted towards short-term U.S. government securities.
Interest Expense.
Interest expense increased to $201.2 million for the six months ended June 30, 2016 from $143.3 million for the six months ended June 30, 2015. This increase in interest expense was primarily due to the impact of our $1.1 billion of senior notes issued in December 2015, $645.2 million outstanding of the seven year term loans we borrowed in January 2016 and $459.8 million of an outstanding bridge term loan we borrowed to finance our acquisition of Bit-isle, which closed in November 2015, as well as additional financings such as various capital lease and other financing obligations to support our expansion projects. During the six months ended June 30, 2016 and 2015, we capitalized
$5.5 million
and $6.5 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 $1.1 billion senior notes offering in December 2015, $645.2 million of seven year term loans we borrowed in January 2016 and $459.8 million of an outstanding bridge term loan which we expect to refinance in 2016. We expect to incur additional indebtedness to support our growth and acquisition opportunities, such as the Bit-isle and TelecityGroup acquisitions, resulting in higher interest expense.
Other Income (Expense).
We recorded net expense of $59.2 million and net income of $0.9 million, respectively, of other income (expense), for the six months ended June 30, 2016 and 2015, primarily due to foreign currency exchange gains and losses during the periods, including $63.5 million in foreign currency losses for the six months ended June 30, 2016 as a result of completing the acquisition of TelecityGroup.
Loss on debt extinguishment.
During the six months ended June 30, 2016, we recorded $605,000 loss on debt extinguishment as a result of the prepayment and termination of our 2012 and 2013 Brazil financings. We did not have loss on debt extinguishment during the six months ended June 30, 2015.
Income Taxes.
Effective January 1, 2015, we have operated as a REIT for federal income tax purposes. As a REIT, we are generally not subject to federal income taxes on the taxable income distributed to our stockholders. We intend to distribute and have distributed the entire taxable income generated by the operations of our REIT and its QRSs for the tax years ended December 31, 2016 and December 31, 2015, respectively. As such, no provision for U.S. income taxes for the REIT and its QRSs has been included in the accompanying condensed consolidated financial statements for the six months ended June 30, 2016 and 2015.
We have made TRS elections for some of our subsidiaries in and outside the U.S. In general, a TRS may provide services that would otherwise be considered impermissible for REITs to provide and may hold assets that REITs cannot hold directly. U.S. income taxes for the TRS entities located in the U.S. and foreign income taxes for our foreign operations regardless of whether the foreign operations are operated as a QRS or TRS were accrued, as necessary, for the six months ended June 30, 2016 and 2015.
For the six months ended June 30, 2016 and 2015, we recorded $3.2 million and $13.7 million of income tax expense, respectively. Our effective tax rates were 61.7% and 9.2%, respectively, for the six months ended June 30, 2016 and 2015. The increase in the effective tax rate for the six months in 2016 as compared to the same period in 2015 is primarily due to a much lower profit before tax for the period, attributable to the non-tax deductible costs related to the TelecityGroup acquisition and an increase in valuation allowance.
Income from Discontinued Operations.
Our net income from discontinued operations was $11.6 million for the six months ended June 30, 2016. We did not have discontinued operations during the six months ended June 30, 2015.
Adjusted EBITDA
. Adjusted EBITDA is a key factor in how we assess the operating performance of our segments and develop regional growth strategies such as IBX data center expansion decisions. We define adjusted EBITDA as income or loss from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges, acquisition costs and gains on asset sales. See "Non-GAAP Financial Measures" below for more information about adjusted EBITDA and a reconciliation of adjusted EBITDA to net income. Our adjusted EBITDA for the six months ended June 30, 2016 and 2015 was split among the following geographic regions (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
% change
|
|
2016
|
|
%
|
|
2015
|
|
%
|
|
Actual
|
|
Constant
currency
|
Americas
|
$
|
379,488
|
|
|
47
|
%
|
|
$
|
343,620
|
|
|
56
|
%
|
|
10
|
%
|
|
12
|
%
|
EMEA
|
244,944
|
|
|
31
|
%
|
|
155,564
|
|
|
25
|
%
|
|
57
|
%
|
|
60
|
%
|
Asia-Pacific
|
176,509
|
|
|
22
|
%
|
|
117,826
|
|
|
19
|
%
|
|
50
|
%
|
|
52
|
%
|
Total
|
$
|
800,941
|
|
|
100
|
%
|
|
$
|
617,010
|
|
|
100
|
%
|
|
30
|
%
|
|
31
|
%
|
Americas Adjusted EBITDA.
The increase in our Americas adjusted EBITDA was due to higher revenues as result of our IBX data center expansion activity and organic growth as described above. During the six months ended June 30, 2016, currency fluctuations resulted in approximately $4.0 million of net unfavorable foreign currency impact on our Americas adjusted EBITDA primarily due to the generally stronger U.S. dollar relative to the Brazilian real and Canadian dollar during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
EMEA Adjusted EBITDA.
Adjusted EBITDA for our EMEA region includes $92.6 million of adjusted EBITDA attributable to our acquisition of TelecityGroup, which closed in January 2016. Excluding adjusted EBITDA attributable to TelecityGroup, the decrease in our EMEA adjusted EBITDA was primarily due to higher operating costs as result of our IBX data center expansion activity and organic growth as described above. During the six months ended June 30, 2016, currency fluctuations resulted in approximately $3.5 million of net unfavorable foreign currency impact to our EMEA adjusted EBITDA primarily due to a generally stronger U.S. dollar relative to the British pound and Euro during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
Asia-Pacific Adjusted EBITDA.
Adjusted EBITDA for our Asia-Pacific region includes $23.7 million of adjusted EBITDA attributable to our acquisition of Bit-isle, which closed in November 2015. Excluding adjusted EBITDA attributable to Bit-isle, the increase in our Asia-Pacific adjusted EBITDA was primarily due to higher revenues as result of our IBX data center expansion activity and organic growth as described above. During the six months ended June 30, 2016, currency fluctuations resulted in approximately $2.5 million of net unfavorable foreign currency impact to our Asia-Pacific adjusted EBITDA primarily due to a generally stronger U.S. dollar relative to the Australian and Singapore dollars and Japanese Yen during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
Non-GAAP Financial Measures
We provide all information required in accordance with generally accepted accounting principles in the United States of America (“GAAP”), but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, we use non-GAAP financial measures to evaluate our operations.
Non-GAAP financial measures are not a substitute for financial information prepared in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation, but should be considered together with the most directly comparable GAAP financial measures and the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures. 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 these non-GAAP financial measures provides consistency and comparability with past reports and provides a better understanding of the overall performance of the business and ability to perform in subsequent periods. We believe that if we did not provide such non-GAAP financial information, investors would not have all the necessary data to analyze Equinix effectively.
Investors should note 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. Investors should therefore exercise caution when comparing non-GAAP financial measures used by us to similarly titled non-GAAP financial measures of other companies.
Our primary non-GAAP financial measures, adjusted funds from operations (“AFFO”) and adjusted EBITDA, 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 an IBX data center do not recur with respect to such data center, although we may incur initial construction costs in future periods with respect to additional IBX data centers, and future capital expenditures remain minor relative to our initial investment. This is a trend we expect to continue. In addition, depreciation is also based on the estimated useful lives of our IBX data centers. These estimates could vary from actual performance of the asset, are based on historical costs incurred to build out our IBX data centers and are not indicative of current or expected future capital expenditures. Therefore, we exclude depreciation from our operating results when evaluating our operations.
In addition, in presenting AFFO and adjusted EBITDA, we exclude amortization expense related to intangible assets, as it represents the amortization of the cost of an intangible asset acquired in an acquisition and is not meaningful in the evaluation 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 represents expense attributed to equity awards that have no current or future cash obligations. As such, we, and many investors and analysts, exclude this stock-based compensation expense when assessing the cash generating performance of our operations. We also exclude restructuring charges. 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. 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. We also exclude gains on asset sales as they do not represent an ongoing activity and are not meaningful in evaluating our current or future operating performance. Finally, we exclude acquisition costs from AFFO and adjusted EBITDA. The acquisition costs relate to costs we incur in connection with business combinations. Management believes items such as restructuring charges, impairment charges, acquisition costs and gains on asset sales are non-core transactions; however, these types of costs may occur in future periods.
Adjusted EBITDA
We define adjusted EBITDA as income or loss from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges, acquisition costs and gains on asset sales as presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Income from continuing operations
|
$
|
151,655
|
|
|
$
|
139,133
|
|
|
$
|
264,343
|
|
|
$
|
290,582
|
|
Depreciation, amortization, and accretion expense
|
213,719
|
|
|
128,270
|
|
|
415,872
|
|
|
250,800
|
|
Stock-based compensation expense
|
39,323
|
|
|
33,993
|
|
|
73,838
|
|
|
64,606
|
|
Acquisition costs
|
15,594
|
|
|
9,866
|
|
|
52,130
|
|
|
11,022
|
|
Gains on asset sales
|
—
|
|
|
—
|
|
|
(5,242
|
)
|
|
—
|
|
Adjusted EBITDA
|
$
|
420,291
|
|
|
$
|
311,262
|
|
|
$
|
800,941
|
|
|
$
|
617,010
|
|
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”.
Funds from Operations (“FFO”) and AFFO
We use FFO and AFFO, which are non-GAAP financial measures commonly used in the REIT industry. FFO is calculated in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO represents net income (loss), excluding gains (losses) from the disposition of real estate assets, depreciation and amortization on real estate assets and adjustments for unconsolidated joint ventures’ and non-controlling interests’ share of these items.
We use AFFO to evaluate our performance on a consolidated basis and as a metric in the determination of employees’ annual bonuses beginning in 2015 and vesting of restricted stock units that were granted beginning in 2015 and that have both service and performance conditions. In presenting AFFO, we exclude certain items that we believe are not good indicators of our current or future operating performance. AFFO represents FFO excluding depreciation and amortization expense on non-real estate assets, accretion, stock-based compensation, restructuring charges, impairment charges, acquisition costs, an installation revenue adjustment, a straight-line rent expense adjustment, amortization of deferred financing costs, gains (losses) on debt extinguishment,
an income tax expense adjustment, recurring capital expenditures and adjustments for unconsolidated joint ventures' and non-controlling interests’ share of these items, gains on asset sales and net income (loss) from discontinued operations, net of tax. The adjustments for both installation revenue and straight-line rent expense are intended to isolate the cash activity included within the straight-lined or amortized results in the consolidated statement of operations. We exclude the amortization of deferred financing costs as these expenses relate to the initial costs incurred in connection with debt financings that have no current or future cash obligations. We exclude gains (losses) on debt extinguishment since it generally represents the write-off of initial costs incurred in connection with debt financings or a cost that is incurred to reduce future interest costs and is not a good indicator of our current or future operating performance. We include an income tax expense adjustment, which represents the non-cash tax impact due to changes in valuation allowances and uncertain tax positions that do not relate to current period’s operations. We deduct recurring capital expenditures, which represent expenditures to extend the useful life of its IBX centers or other assets that are required to support current revenues. We also exclude net income (loss) from discontinued operations, net of tax, which represents results that may not recur and are not a good indicator of our current future operating performance.
Our FFO and AFFO for the three and six months ended June 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
$
|
44,711
|
|
|
$
|
59,459
|
|
|
$
|
13,600
|
|
|
$
|
135,911
|
|
Adjustments:
|
|
|
|
|
|
|
|
Real estate depreciation and amortization
|
158,727
|
|
|
107,321
|
|
|
309,722
|
|
|
209,969
|
|
(Gain) loss on disposition of real estate property
|
(1,951
|
)
|
|
559
|
|
|
(5,988
|
)
|
|
621
|
|
Adjustments for FFO from unconsolidated joint ventures
|
28
|
|
|
29
|
|
|
56
|
|
|
57
|
|
NAREIT FFO attributable to common shareholders
|
$
|
201,515
|
|
|
$
|
167,368
|
|
|
$
|
317,390
|
|
|
$
|
346,558
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
NAREIT FFO attributable to common shareholders
|
$
|
201,515
|
|
|
$
|
167,368
|
|
|
$
|
317,390
|
|
|
$
|
346,558
|
|
Adjustments:
|
|
|
|
|
|
|
|
Installation revenue adjustment
|
7,407
|
|
|
12,474
|
|
|
10,761
|
|
|
21,128
|
|
Straight-line rent expense adjustment
|
1,895
|
|
|
2,017
|
|
|
3,028
|
|
|
5,218
|
|
Amortization of deferred financing costs
|
5,243
|
|
|
3,848
|
|
|
10,751
|
|
|
7,706
|
|
Stock-based compensation expense
|
39,323
|
|
|
33,993
|
|
|
73,838
|
|
|
64,606
|
|
Non-real estate depreciation expense
|
21,021
|
|
|
13,605
|
|
|
42,408
|
|
|
26,298
|
|
Amortization expense
|
32,303
|
|
|
6,450
|
|
|
60,455
|
|
|
12,745
|
|
Accretion expense
|
1,668
|
|
|
894
|
|
|
3,287
|
|
|
1,788
|
|
Recurring capital expenditures
|
(31,928
|
)
|
|
(27,330
|
)
|
|
(63,743
|
)
|
|
(49,703
|
)
|
Loss on debt extinguishment
|
605
|
|
|
—
|
|
|
605
|
|
|
—
|
|
Acquisition costs
|
15,594
|
|
|
9,866
|
|
|
52,130
|
|
|
11,022
|
|
Income tax expense adjustment
|
1,301
|
|
|
(1,784
|
)
|
|
1,111
|
|
|
(4,192
|
)
|
Adjustments for AFFO from unconsolidated joint ventures
|
(9
|
)
|
|
(13
|
)
|
|
(21
|
)
|
|
(30
|
)
|
Net income from discontinued operations, net of tax
|
(5,409
|
)
|
|
—
|
|
|
(11,625
|
)
|
|
—
|
|
Adjusted Funds from Operations (AFFO) attributable to common shareholders
|
$
|
290,529
|
|
|
$
|
221,388
|
|
|
$
|
500,375
|
|
|
$
|
443,144
|
|
Our AFFO results have improved 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.”
Constant Currency Presentation
Our revenues and certain operating expenses (cost of revenues, sales and marketing expenses and general and administrative expenses) from our international operations have represented and will continue to represent a significant portion of our total revenues and certain operating expenses. As a result, our revenues and certain operating expenses have been and will continue to be affected by changes in the U.S. dollar against major international currencies such as the Brazilian real, British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen, 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 the exchange rates in effect for the comparable prior period rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the three months ended June 30, 2015 are used as exchange rates for the three months ended June 30, 2016 when comparing the three months ended June 30, 2016 with the three months ended June 30, 2015 and average rates in effect for the six months ended June 30, 2015 are used as exchange rates for the six months ended June 30, 2016 when comparing the six months ended June 30, 2016 with the six months ended June 30, 2015).
Liquidity and Capital Resources
As of June 30, 2016, our total indebtedness was comprised of debt and financing obligations totaling
$7.1 billion
consisting of (a)
$3.9 billion
of principal from our senior notes, (b) approximately
$1.6 billion
from our capital lease and other financing obligations, and (c)
$1.6 billion
of principal from our mortgage and loans payable (gross of discount and premium).
We believe we have sufficient cash and access to liquidity, 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 regular dividends and completion of our publicly-announced expansion projects. As of June 30, 2016, we had
$494.2 million
of cash, cash equivalents and short-term and long-term investments, of which approximately
$97.8 million
was held in the U.S. We believe that our current expansion activities can be funded with our cash and cash equivalents and investments. Besides our cash and investment portfolio, we have additional liquidity available to us from the $1.5 billion revolving credit facility.
As of June 30, 2016, we had
29
irrevocable letters of credit totaling
$39.2 million
issued and outstanding under the U.S. revolving credit line; as a result, we had a total of approximately
$1.5 billion
of additional liquidity available to us under the revolving credit facility. Besides 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. Additionally, 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. We are also now operating as a REIT and paying regular, recurring cash dividends. While we expect to fund these plans with our existing resources, additional financing, either debt or equity, may be required and if current market conditions were to deteriorate, we may be unable to secure additional financing or any such additional financing may only be available to us on unfavorable terms. An inability to pursue additional expansion opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods.
Sources and Uses of Cash
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2015
|
|
(dollars in thousands)
|
Net cash provided by operating activities
|
$
|
383,098
|
|
|
$
|
445,274
|
|
Net cash used in investing activities
|
(1,575,717
|
)
|
|
(498,376
|
)
|
Net cash used in financing activities
|
(546,293
|
)
|
|
(218,356
|
)
|
Operating Activitie
s. The decrease in net cash provided by operating activities was primarily due to an increase in cash payments related to TelecityGroup acquisition costs and settlement of derivative liabilities associated with the TelecityGroup purchase price. We expect we will continue to generate cash from our operating activities during the remainder of 2016 and beyond.
Investing Activities.
The net cash used in investing activities for the six months ended June 30, 2016 was primarily due to $1,601.6 million, net of cash acquired for the acquisition of TelecityGroup and remaining amounts due for Bit-isle shares, partially offset by the release of $466.6 million of restricted cash that was set aside for the TelecityGroup acquisition. Other investing cash flows for the six months included $447.6 million of capital expenditures primarily related to our expansion activity, purchase of real estate for $28.1 million and purchase of investment for $16.5 million, partially offset by proceeds from the sale of assets of $22.8 million and sales and maturities of investments for $28.7 million.
The net cash used in investing activities for the six months ended June 30, 2015 was primarily due to a $493.8 million increase in restricted cash in connection with our cash and share offer for TelecityGroup, $371.5 million of capital expenditures primarily as a result of expansion activity, $38.3 million for the purchases of land in San Jose, California and $324.3 million for purchases of investments, offset by sales and maturities of investments for $753.6 million.
Financing Activities.
The net cash used in financing activities for the six months ended June 30, 2016 was primarily due to repayments of loans of $973.1 million relating to loans assumed from TelecityGroup acquisition, our revolving credit facility and our Brazil financings facility; dividend distributions of $246.7 million and repayments of $45.3 million of capital lease and other financing obligations, partially offset by borrowings of $701.3 million under our multicurrency Term B loan facility and bridge term loan, and proceeds from employee equity awards of $17.6 million. The net cash used in financing activities for the six months ended June 30, 2015 was primarily due to $518.6 million of repayments of U.S. dollar-denominated term loan and other mortgage and loan payments and $193.0 million of dividend distributions, offset by $490.0 million of proceeds from our term loan modification. Going forward, we expect that our financing activities will consist primarily of repayment of our debt and additional financings needed to support expansion opportunities, additional acquisitions or joint ventures and the payment of our regular cash dividends.
Contractual Obligations and Off-Balance-Sheet Arrangements
We lease a majority of our IBX data centers and certain equipment under non-cancellable lease agreements expiring through 2065. The following represents our debt maturities, financings, leases and other contractual commitments as of June 30, 2016 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
(6 months)
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Thereafter
|
|
Total
|
Term loans (1)
|
$
|
23,292
|
|
|
$
|
46,584
|
|
|
$
|
46,584
|
|
|
$
|
347,451
|
|
|
$
|
6,468
|
|
|
$
|
616,115
|
|
|
$
|
1,086,494
|
|
Interest (2)
|
135,901
|
|
|
246,947
|
|
|
245,952
|
|
|
244,969
|
|
|
227,793
|
|
|
735,272
|
|
|
1,836,834
|
|
Capital lease and other financing obligations (3)
|
112,080
|
|
|
169,819
|
|
|
166,276
|
|
|
161,760
|
|
|
159,167
|
|
|
1,762,246
|
|
|
2,531,348
|
|
Operating leases (4)
|
74,978
|
|
|
144,598
|
|
|
137,020
|
|
|
130,994
|
|
|
117,735
|
|
|
992,589
|
|
|
1,597,914
|
|
Other contractual commitments (5)
|
664,205
|
|
|
201,632
|
|
|
35,369
|
|
|
4,616
|
|
|
4,189
|
|
|
39,391
|
|
|
949,402
|
|
Asset retirement obligations (6)
|
1,787
|
|
|
11,991
|
|
|
7,116
|
|
|
12,726
|
|
|
6,052
|
|
|
68,321
|
|
|
107,993
|
|
|
$
|
1,012,243
|
|
|
$
|
821,571
|
|
|
$
|
638,317
|
|
|
$
|
902,516
|
|
|
$
|
521,404
|
|
|
$
|
4,213,934
|
|
|
$
|
8,109,985
|
|
|
|
(1)
|
Represents principal only.
|
|
|
(2)
|
Represents interest on mortgage payable, senior notes, term loans, Brazil financings and other loans payable based on their approximate interest rates as of June 30, 2016.
|
|
|
(3)
|
Represents principal and interest.
|
|
|
(4)
|
Represents minimum operating lease payments, excluding potential lease renewals.
|
|
|
(5)
|
Represents off-balance sheet arrangements. Other contractual commitments are described below.
|
|
|
(6)
|
Represents liability, net of future accretion expense.
|
In order to obtain the approval of the European Commission for our acquisition of TelecityGroup, we divested certain data centers, including our London 2 data center in London, UK and certain data centers of TelecityGroup on July 5, 2016. The table above includes obligations of those data centers as of June 30, 2016.
In connection with certain of our leases and other contracts requiring deposits, we entered into
29
irrevocable letters of credit totaling
$39.2 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
$44.1 million
as of June 30, 2016. 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.
Primarily as a result of our various IBX data center expansion projects, as of June 30, 2016, we were contractually committed for
$441.9 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 2016 and thereafter, is reflected in the table above as “other contractual commitments.”
We had other non-capital purchase commitments in place as of June 30, 2016, 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 2016 and beyond. Such other purchase commitments as of June 30, 2016, which total
$507.5 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
$589.4 million
to
$689.4 million
, in addition to the
$949.4 million
in contractual commitments discussed above as of June 30, 2016, in our various IBX data center expansion projects during 2016 and thereafter in order to complete the work needed to open these IBX data centers. These non-contractual capital expenditures are not reflected in the table above. If we so choose, whether due to economic factors or other considerations, we could delay these non-contractual capital expenditure commitments to preserve liquidity.
Critical Accounting Policies and Estimates
Our consolidated financial statements and accompanying notes are prepared in accordance with GAAP. The preparation of our 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. On an ongoing basis, management evaluates the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. Management bases its assumptions, estimates and judgments on historical experience, current trends and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these assumptions and estimates, and such differences could be material. 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, 2015.
We began operating as a REIT for federal income tax purposes effective January 1, 2015. In May 2015, we received a favorable PLR from the IRS in connection with our conversion to a REIT. As of June 30, 2016, our REIT structure includes all of our data center operations in the U.S. and Canada and our historical data center operations in Europe and Japan. Our data center operations in other jurisdictions, as well as the data center operations acquired in the TelecityGroup and Bit-isle Acquisitions, have initially been designated as TRSs. As a REIT, we generally are permitted to deduct from federal taxable income the dividends we pay to our stockholders (including, for this purpose, the value of any deemed distribution on account of adjustments to the conversion rate relating to our outstanding debt securities that are convertible into our common stock). The income represented by such dividends is not subject to federal taxation at the entity level but is taxed, if at all, at the stockholder level.
We have made TRS elections for some of our subsidiaries in and outside the U.S. In general, a TRS may provide services that would otherwise be considered impermissible for REITs to provide and may hold assets that REITs cannot hold directly. U.S. income taxes for the TRS entities located in the country and foreign income taxes for our foreign operations were accrued, as necessary, for the three and six months ended June 30, 2016.
Recent Accounting Pronouncements
See Note 1 of Notes to Condensed Consolidated Financial Statements in Item 1 of this Quarterly Report on Form 10-Q.
|
|
|
Item 3.
|
Quantitative and Qualitative Disclosures about Market Risk
|
Market Risk
While there have been no significant changes in our market risk, investment portfolio risk, interest rate risk, foreign currency risk and commodity price risk exposures and procedures during the six months ended June 30, 2016 as compared to the respective risk exposures and procedures disclosed in Quantitative and Qualitative Disclosures About Market Risk, set forth in Part II Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2015, fluctuations in foreign currency exchange rates have a direct impact on our consolidated financial position and results of operations during the six months ended June 30, 2016. Continued strengthening or weakening of the U.S. dollar will continue to have a significant impact to us in future periods.
Excluding consideration from hedging contracts, an immediate 10% appreciation in current foreign exchange rates as of June 30, 2016 would have resulted in an increase of $96.2 million and $12.4 million in revenue and net income before taxes for the six months ended June 30, 2016. Excluding consideration from hedging contracts, an immediate 10% depreciation in current foreign exchange rates as of June 30, 2016 would have resulted in a decrease of $97.9 million and $14.2 million in revenue and net income before taxes for the six months ended June 30, 2016.
Interest Rate Risk
An immediate 10% increase or decrease in current interest rates from their position as of June 30, 2016 would not have a material impact on our debt obligations due to the fixed nature of the majority of our debt obligations. However, the interest expense associated with our senior credit facility, term loans, and bridge term loan, which bear interest at variable rates, could be affected. For every 100 basis point change in interest rates, our annual interest expense could increase or decrease by a total of approximately $5.5 million based on the total balance of our primary borrowings under the term loan A and B facilities and bridge term loan as of June 30, 2016. As of June 30, 2016, we had not employed any interest rate derivative products against our debt obligations. However, we may enter into interest rate hedging agreements in the future to mitigate our exposure to interest rate risk.
|
|
|
Item 4.
|
Controls and Procedures
|
(a)
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, conducted an evaluation, pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this quarterly report. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
(b)
Changes in Internal Control over Financial Reporting.
We completed the acquisition of TelecityGroup in the first quarter of 2016. We are evaluating changes to processes and other components of internal controls over financial reporting of Telecity as part of the ongoing integration activities. There have not been any other changes in our internal control reporting that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c)
Limitations on the Effectiveness of Controls.
Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed and operated to be effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.