01—Abstract
Summary
Summary of the 10-K filed March 27, 2003. Cited figures are marked; the original filing is the authoritative source.
Equinix's FY2002 10-K shows a company that remained deeply unprofitable at the operating level but completed a major recapitalization on December 31, 2002.
Revenue rose 22% to $77.2 milliona (about 17% excluding $2.9 million of equipment resale), and loss from operations narrowed to $101.7 million from $155.3 million, helped by $48.6 million less in restructuring charges in 2002 than 2001's $48.6 million... more precisely, $28.9 million of restructuring charges in 2002 versus $48.6 million in 2001. The reported net loss of $21.6 million is misleading: it includes a $114.2 million gain on debt extinguishment from retiring $169.5 million of 13% senior notes for shares and cash. Excluding that gain, the net loss would be roughly $135.8 million.
The December 31, 2002 combination with Singapore's i-STT and Hawaii-based Pihana Pacific added Asia-Pacific IBX hubs, brought in roughly 3.5 million common shares and 1.9 million Series A preferred shares, and was funded by a $30.0 millionb 14% convertible secured note from STT Communications. STT Communications now holds about 28% of voting stock and could gain effective control. Management projects about $13.0 million in annual cost savings and about $15.8 million in lower cash interest, and expects positive operating cash flow by the end of 2003.
Total debt fell to $161.6 millionc from $319.2 million, but the $91.5 million credit facility is subject to reset covenants, cross-default risk, and a monthly minimum cash requirement. Key risks for investors include the going-concern-like dependence on the amended credit facility, heavy customer concentration (IBM at 20% of revenue), a sharp reverse stock split (32-for-1), a 2001 securities class action tied to the IPO, and a $30.5 million senior note balance and $91.5 million credit facility maturing in 2005 to 2007. Accumulated deficit stood at $351.6 million.
02—Key points
Key Highlights
- Revenue grew 22% to $77.2 million in 2002 from $63.4 million; excluding $2.9 million of equipment resale, growth was about 17%, with 303 pre-merger customers at year-end versus 218 a year earlier.
- Net loss narrowed to $21.6 million from $188.4 million, but this includes a $114.2 million gain on debt extinguishment; operating loss was $101.7 million versus $155.3 million in 2001.
- Combination with i-STT and Pihana (closed December 31, 2002) expanded the footprint to 15 IBX hubs across six countries, including Singapore, Tokyo, Hong Kong, Sydney, and Bangkok, with Asia-Pacific expected to be about 15% of revenue in 2003.
- Debt reduced to $161.6 million from $319.2 million through the senior note exchange ($116.8 million retired for 1.9 million shares and $15.2 million cash) and $30.0 million convertible note financing from STT Communications.
- STT Communications holds about 28% of voting stock and could gain effective control, and IBM represented 20% of 2002 revenue, creating concentration risk.
- Credit facility of $91.5 million has reset covenants, cross-default provisions, and a monthly minimum cash covenant; the company states that $41.2 million cash plus expected cash flow should cover needs for 12 months.
- Accumulated deficit of $351.6 million and cumulative cash used in operating and construction activities of $691.5 million underscore the company's limited operating history and continued losses.
03—Questions
Frequently Asked Questions
Did Equinix actually become profitable in 2002?
No. The reported net loss was $21.6 million, but that figure includes a $114.2 million gain from retiring senior notes at a steep discount. Excluding that gain, the net loss would be roughly $135.8 million, and the operating loss was $101.7 million. The company is still unprofitable and expects operating losses to continue, particularly from Asia-Pacific.
What did the December 2002 combination with i-STT and Pihana do to the company?
It added IBX hubs in Singapore, Thailand, Tokyo, Hong Kong, Sydney, Hawaii, and Los Angeles, and increased the company's footprint to 15 hubs. Equinix issued about 3.5 million common shares and about 1.9 million Series A preferred shares, and received $30.0 million of cash financing from STT Communications. Management expects about $13.0 million in annual operating cost savings and about $15.8 million in lower cash interest, but Pihana's centers are expected to lose money for about 24 months.
What are the biggest risks to the investment thesis?
The main risks are covenant compliance under the $91.5 million credit facility, cross-default exposure to other debt, dependence on STT Communications (about 28% of voting stock with potential for effective control), heavy reliance on IBM (20% of 2002 revenue), declining per-square-foot pricing, lack of diversification in power and utility costs, and dilution plus potential share sales from the recapitalization. There is also a securities class action from the 2000 IPO, which the company intends to defend vigorously.
Is the company's liquidity sufficient?
Management said $41.2 million of cash and cash equivalents, together with expected positive operating cash flow by the end of 2003 and planned cost savings, will cover working capital, debt service, and overhead for the next twelve months. However, the company acknowledged that if covenants are breached, lenders could require repayment of the $91.5 million credit facility, and it would not have sufficient cash to repay it without a forbearance or refinancing.
Why did the share count and stock price figures change so much?
On December 31, 2002, Equinix completed a 32-for-1 reverse stock split to satisfy Nasdaq's minimum bid price and initial listing requirements. All share and per-share figures in the filing are adjusted for this split. Shares outstanding rose to 8.45 million from 2.50 million after the combination and debt exchange, and the stock traded between $5.70 and $108.16 (split-adjusted) during 2002.
04—Continue