01—Abstract
Summary
Summary of the 10-K filed March 27, 2001. Cited figures are marked; the original filing is the authoritative source.
Equinix (EQIX) reported its first full year of meaningful operations in fiscal 2000, with revenues rising to $13.0 milliona from just $37,000 in 1999, as it began commercial operation of its neutral Internet Business Exchange (IBX) centers.
The top line is still tiny relative to the scale of the build-out, and the company posted a net loss of $119.8 millionb (EPS of -$3.48), with operating expenses of $120.1 million, including $29.9 million of stock-based compensation. Adjusted EBITDA was negative $62.4 million, though management noted that three of its six IBX centers had reached positive adjusted EBITDA. The company is pre-profit and says it may never achieve profitability.
The balance sheet is strong for the moment but reflects heavy capital intensity. Following its August 2000 IPO (net proceeds of $251.5 millionc), Equinix held $207.2 million in cash and short-term investments at year-end, plus $36.9 million of restricted cash. Total assets reached $683.5 million, driven by $315.4 million of property and equipment and $94.9 million of construction in progress.
Total indebtedness was $210.9 milliond, primarily the 13% senior notes due 2007. In December 2000 the company also obtained a $150 million senior secured credit facility, of which $50 million was drawn on January 2, 2001 and $75 million on March 5, 2001. Operating cash burn was $68.1 million and investing outflows were $302.2 million.
Investors should weigh the company's strategic position against substantial execution and financing risks. Customer concentration is high, with two customers accounting for 12% and 11% of revenues. The rollout depends on Bechtel for construction and on third-party carriers to connect fiber to the facilities.
Management also expects heavy losses to continue, with deferred stock-based compensation of $38.4 million to be amortized through 2004. The long-term thesis depends on the neutral-exchange model gaining enough customer and carrier adoption to turn the IBX network profitable.
02—Key points
Key Highlights
- Revenue grew from $37,000 in 1999 to $13.0 million in 2000, with recurring revenue of $11.6 million from cabinet space and power leasing.
- Net loss widened to $119.8 million ($3.48 per share) from $20.8 million in 1999, driven by a $29.9 million stock-based compensation charge and $29.1 million of interest expense.
- Adjusted EBITDA loss was $62.4 million, but three of six IBX centers had reached positive adjusted EBITDA by year-end.
- The August 2000 IPO raised $251.5 million net; year-end cash and short-term investments were $207.2 million, plus $36.9 million restricted.
- Total indebtedness was $210.9 million, mainly $200 million of 13% senior notes due 2007; a $150 million senior secured facility was obtained in December 2000 and was drawn for $125 million in early 2001.
- Customer concentration is significant: two customers accounted for 12% and 11% of 2000 revenues, and 42% of participants have multi-site contracts.
- Management plans to open a seventh U.S. IBX center in 2001 and expand internationally, with leased sites in Amsterdam, Paris, London and Frankfurt.
03—Questions
Frequently Asked Questions
How much did Equinix's revenue grow in 2000, and is the business generating a profit?
Revenue rose to $13.0 million in 2000 from $37,000 in 1999, but the company is far from profitable. It posted a net loss of $119.8 million and an adjusted EBITDA loss of $62.4 million. Management says it expects continued losses and may never reach profitability.
How well capitalized is Equinix to fund its IBX build-out?
At December 31, 2000 Equinix had $207.2 million in cash and short-term investments and $36.9 million in restricted cash. Its $150 million senior secured credit facility was drawn for $50 million on January 2, 2001 and $75 million on March 5, 2001. Operating cash burn was $68.1 million in 2000, and management says current resources should be enough to complete one additional IBX center by the end of 2001, with further expansion dependent on additional financing.
What are the main risks to investors?
Key risks include an unproven business model, a history of losses, high leverage with restrictive debt covenants, reliance on a small number of customers, dependence on Bechtel for construction and on carriers for fiber connectivity, power-cost exposure in California, and intense competition from better-capitalized colocation providers and carriers. The stock has also been volatile since its IPO.
Why does Equinix have such large non-cash expenses, and when do they end?
Stock-based compensation was $29.9 million in 2000, and $38.4 million of deferred stock-based compensation remains to be amortized over remaining vesting periods, which management expects to run through December 31, 2004. Depreciation rose to $14.8 million and interest expense to $29.1 million as the IBX centers came online.
What is the company's competitive positioning?
Equinix positions itself as a neutral exchange offering customers a choice of bandwidth providers, ISPs and site management companies within each IBX center. Its IBX centers connect to carriers including UUNET/WorldCom, AT&T, Qwest and Level 3, which management says serve over 85% of the world's Internet networks. Competitors include AboveNet, Exodus, Globix, carriers, and emerging colocation providers such as InterNAP and Telehouse.
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