Is Equinix close to becoming cash-flow positive and self-funding?

Management says Equinix began generating positive operating cash flow in the quarter ended September 30, 2003, and expects to generate operating cash in 2004 that covers capital expenditures. Full-year 2003 operating cash use still totaled $17.3M, so the company has not yet shown a full year of positive operating cash flow. Its fixed-cost base means management expects incremental revenue to flow through at 70–90% gross margin.

How strong is the balance sheet after the February 2004 financing?

Year-end cash and short-term investments were $73.0M. The $86.25M convertible debenture sale was used to repay the credit facility, the VLL and Heller loans, and to redeem the 13% senior notes. That removes the floating-rate credit facility and the 13% notes, leaving the convertible secured notes (about $43.6M principal, convertible at roughly $9.18 and $4.00 per share) and the new 2.5% debentures as the main long-term obligations. Total stockholders' equity was $320.1M, and management believes cash plus remaining proceeds will cover needs for at least 12 months.

What are the key risks to Equinix's revenue?

Key risks include reliance on IBM, which was 15% of revenue, and dependence on carriers and networks remaining in the IBX hubs. Competition from carrier-operated and neutral colocation providers could pressure pricing, and Singapore faces pricing pressure and fewer carriers. The company also notes that a Secaucus IBX landlord may double rent expense from 2005. Uncertain market growth, power-cost increases, and property-tax increases are additional risks.

Could shareholder influence or dilution affect common stockholders?

Yes. STT Communications held about 28.5% of voting stock at year-end and may exceed 40% after December 31, 2004. Large share issuances from the Pihana/i-STT combination, the Crosslink financing, and convertible secured notes could also pressure the stock price and dilute EPS. The company has never paid dividends and is restricted from doing so under its credit agreements. Its NOLs are largely limited under Section 382, and it carries a full valuation allowance against deferred tax assets.

EQIX 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 5, 2004. Cited figures are marked; the original filing is the authoritative source.

Equinix (EQIX) reported FY2003 results that show a company approaching operating cash-flow breakeven but still deeply unprofitable.

Revenue rose 53% to $117.9 million^a from $77.2 million, driven by recurring colocation and interconnection revenue (93% of total) and the first full year of Asia-Pacific operations acquired in the December 31, 2002 i-STT and Pihana combination. Net loss narrowed to $84.2 million ($8.76 per share) from $21.6 million in 2002, but that comparison is distorted by a $114.2 million debt-extinguishment gain in 2002. Management says the company became operating-cash-flow positive beginning Q3 2003 and expects to generate cash from operations throughout 2004, though net cash used in operating activities was still $17.3 million for the year.

Balance-sheet risk remains the central investor concern. Cash and short-term investments were $73.0 million^b at year-end, against total debt and lease obligations that include $43.6 million of convertible secured notes held largely by STT Communications and Crosslink, a $34.3 million credit facility, and $30.5 million of 13% senior notes. In February 2004 the company sold $86.25 million of 2.5% convertible subordinated debentures due 2024 and used the proceeds to repay the credit facility and two other loans, with plans to redeem the 13% senior notes in March 2004.

Management expects a significant loss on debt extinguishment in Q1 2004. The company states that its cash plus remaining proceeds should fund operations and debt service for at least 12 months. Customer concentration is significant, with IBM at 15%^c of 2003 revenue, and a landlord option could roughly double rent at the Secaucus, New Jersey IBX hub from 2005.

Ownership and governance are also important. STT Communications owned about 28.5%^d of voting stock at year-end and may exceed 40% after December 31, 2004, which gives it substantial influence over stockholder votes.

Equinix faces the IPO allocation securities class action, with a settlement pending court approval that management expects to be funded mainly by insurers. The company has a full valuation allowance against deferred tax assets, its NOLs are heavily limited by a Section 382 ownership change, and it reports only 431 employees and 14 IBX hubs.

02—Key points

Key Highlights

Revenue grew 53% to $117.9M in 2003 (from $77.2M), with recurring revenue at 93% of the total and 712 customers at year-end (up 25%).
Net loss narrowed to $84.2M ($8.76/share) from $21.6M in 2002, but 2002 benefited from a $114.2M gain on debt extinguishment; 2001 net loss was $188.4M.
Management reports operating cash flow turned positive from Q3 2003 and expects cash generation from operations in 2004, though FY2003 operating cash use was still $17.3M.
Year-end cash and short-term investments of $73.0M, with the company raising $104.4M net in a November 2003 follow-on equity offering at $20.00 per share.
February 2004 sale of $86.25M 2.5% convertible subordinated debentures due 2024 used to retire the credit facility and other loans and to redeem the $30.5M 13% senior notes, with a Q1 2004 debt-extinguishment loss expected.
Customer concentration: IBM represented 15% of 2003 revenue (20% in 2002), and STT Communications owned about 28.5% of voting stock, with influence expected to increase after end-2004.
Expansion and footprint: 14 IBX hubs across the U.S. and Asia-Pacific (over 1.2M gross sq ft) after the Santa Clara (Sprint) acquisition; utilization rose to 37% from 29%.

03—Questions

Frequently Asked Questions

Is Equinix close to becoming cash-flow positive and self-funding?
Management says Equinix began generating positive operating cash flow in the quarter ended September 30, 2003, and expects to generate operating cash in 2004 that covers capital expenditures. Full-year 2003 operating cash use still totaled $17.3M, so the company has not yet shown a full year of positive operating cash flow. Its fixed-cost base means management expects incremental revenue to flow through at 70–90% gross margin.
How strong is the balance sheet after the February 2004 financing?
Year-end cash and short-term investments were $73.0M. The $86.25M convertible debenture sale was used to repay the credit facility, the VLL and Heller loans, and to redeem the 13% senior notes. That removes the floating-rate credit facility and the 13% notes, leaving the convertible secured notes (about $43.6M principal, convertible at roughly $9.18 and $4.00 per share) and the new 2.5% debentures as the main long-term obligations. Total stockholders' equity was $320.1M, and management believes cash plus remaining proceeds will cover needs for at least 12 months.
What are the key risks to Equinix's revenue?
Key risks include reliance on IBM, which was 15% of revenue, and dependence on carriers and networks remaining in the IBX hubs. Competition from carrier-operated and neutral colocation providers could pressure pricing, and Singapore faces pricing pressure and fewer carriers. The company also notes that a Secaucus IBX landlord may double rent expense from 2005. Uncertain market growth, power-cost increases, and property-tax increases are additional risks.
Could shareholder influence or dilution affect common stockholders?
Yes. STT Communications held about 28.5% of voting stock at year-end and may exceed 40% after December 31, 2004. Large share issuances from the Pihana/i-STT combination, the Crosslink financing, and convertible secured notes could also pressure the stock price and dilute EPS. The company has never paid dividends and is restricted from doing so under its credit agreements. Its NOLs are largely limited under Section 382, and it carries a full valuation allowance against deferred tax assets.

04—Continue

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