Why did Equinix's net loss shrink so much in 2002?

The 2002 net loss of $21.6 million includes a $114.2 million gain on debt extinguishment from retiring $169.5 million of senior notes at a steep discount. Excluding that gain, the loss would have been about $135.8 million, compared with $188.4 million in 2001, which included $48.6 million in restructuring charges. Operating losses remained substantial at $101.7 million.

Is Equinix at risk of defaulting on its debt?

The company says it believes cash on hand plus projected cash flow should cover obligations for the next twelve months. However, the $91.5 million credit facility has covenants that were reset, and a breach could allow lenders to demand repayment, triggering cross-defaults on other facilities. The company has only $41.2 million in cash, so it may need to seek forbearance or new financing if performance falls short.

What does the Asia-Pacific acquisition mean for future results?

The i-STT and Pihana combination added IBX hubs in Singapore, Thailand, Tokyo, Hong Kong, Sydney, and Bangkok. Management expects Asia-Pacific to represent about 15% of 2003 revenue, but also expects substantial increases in cost of revenue, sales and marketing, and G&A. Pihana's centers are expected to run at a loss for about 24 months, so near-term profitability may be delayed.

Who controls Equinix now?

STT Communications, a Singapore company, owns about 28% of voting stock after the transactions. Until December 31, 2004, its convertible notes and warrants cannot be converted into voting stock if that would push its ownership above 40%, but after that restriction expires it could effectively control the company and elect directors. STT also has three board nominees under governance provisions.

Are there large share sales or dilution risks for investors?

Yes. Shares issued in the senior note exchange may be sold immediately, and shares issued in the combination were to be registered for resale within six months. Convertible notes and warrants held by STT may also be converted or exercised and resold. Combined with the 32-for-1 reverse stock split completed December 31, 2002, these issuances substantially increase the share count and could pressure the stock price and earnings per share.

EQIX 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K/A filed April 25, 2003. Cited figures are marked; the original filing is the authoritative source.

Equinix's 10-K/A for fiscal 2002 shows a company in deep transition.

Revenue grew to $77.2 million^a from $63.4 million, but the net loss narrowed sharply to $21.6 million from $188.4 million. That improvement is largely due to a $114.2 million net gain on debt extinguishment from the December 2002 senior note exchange, without which the operating loss was about $101.7 million. Loss from operations, restructuring charges of $28.9 million, and interest expense of $35.1 million remain heavy.

Cash fell to $41.2 million^b, and operating cash burn was $27.5 million. Total debt was reduced to $161.6 million, including a $30.0 million 14% convertible secured note issued to STT Communications. The most important development is the December 31, 2002 combination with i-STT and Pihana, which added Asia-Pacific IBX hubs in Singapore, Thailand, Tokyo, Hong Kong, Sydney, and Bangkok, and brought the company to 15 IBX hubs.

Management expects Asia-Pacific to contribute about 15% of fiscal 2003 revenue and projects $13.0 million^c in annual operating expense savings and roughly $15.8 million in annual cash interest savings. However, the company expects substantial new costs from the Asia-Pacific operations and continued operating losses, particularly from Pihana's centers, which are expected to lose money for about 24 months. Management says cash flow from operations should turn positive by the end of 2003, but the company acknowledges it may need additional capital.

Investors face significant risk. The $91.5 million^d credit facility carries covenants that could trigger repayment and cross-defaults if not met. STT Communications holds roughly 28% of voting stock and could reach effective control above 40%.

Share count rose sharply after a 32-for-1 reverse split, and the company has an accumulated deficit of $351.6 million. The stock traded between $5.70 and $108.16 during 2002 on a split-adjusted basis. Concentration risk is also notable, since IBM represented 20% of 2002 revenue.

02—Key points

Key Highlights

Revenue rose 22% to $77.2 million in 2002, though excluding $2.9 million of equipment resale revenue, growth was about 17% to $74.2 million.
Net loss improved to $21.6 million from $188.4 million, but this was driven by a $114.2 million gain on debt extinguishment; operating loss was $101.7 million.
The December 31, 2002 combination with i-STT and Pihana expanded Equinix to 15 IBX hubs across the U.S. and Asia-Pacific and is expected to contribute about 15% of 2003 revenue.
Total debt fell to $161.6 million from $319.2 million after senior note exchanges and the $30.0 million STT convertible secured note; $91.5 million remains under the credit facility.
Cash and equivalents were $41.2 million at year-end, with $27.5 million used in operations, creating liquidity pressure and reliance on projected 2003 cash flow break-even.
STT Communications owns about 28% of voting stock and could gain effective control above 40%, while IBM accounted for 20% of 2002 revenue.
Management projects $13.0 million in annual operating expense savings and $15.8 million in annual cash interest savings from the combination.

03—Questions

Frequently Asked Questions

Why did Equinix's net loss shrink so much in 2002?
The 2002 net loss of $21.6 million includes a $114.2 million gain on debt extinguishment from retiring $169.5 million of senior notes at a steep discount. Excluding that gain, the loss would have been about $135.8 million, compared with $188.4 million in 2001, which included $48.6 million in restructuring charges. Operating losses remained substantial at $101.7 million.
Is Equinix at risk of defaulting on its debt?
The company says it believes cash on hand plus projected cash flow should cover obligations for the next twelve months. However, the $91.5 million credit facility has covenants that were reset, and a breach could allow lenders to demand repayment, triggering cross-defaults on other facilities. The company has only $41.2 million in cash, so it may need to seek forbearance or new financing if performance falls short.
What does the Asia-Pacific acquisition mean for future results?
The i-STT and Pihana combination added IBX hubs in Singapore, Thailand, Tokyo, Hong Kong, Sydney, and Bangkok. Management expects Asia-Pacific to represent about 15% of 2003 revenue, but also expects substantial increases in cost of revenue, sales and marketing, and G&A. Pihana's centers are expected to run at a loss for about 24 months, so near-term profitability may be delayed.
Who controls Equinix now?
STT Communications, a Singapore company, owns about 28% of voting stock after the transactions. Until December 31, 2004, its convertible notes and warrants cannot be converted into voting stock if that would push its ownership above 40%, but after that restriction expires it could effectively control the company and elect directors. STT also has three board nominees under governance provisions.
Are there large share sales or dilution risks for investors?
Yes. Shares issued in the senior note exchange may be sold immediately, and shares issued in the combination were to be registered for resale within six months. Convertible notes and warrants held by STT may also be converted or exercised and resold. Combined with the 32-for-1 reverse stock split completed December 31, 2002, these issuances substantially increase the share count and could pressure the stock price and earnings per share.

04—Continue

← View all 10-K filings