Is Equinix now profitable on an operating basis?

Not on a GAAP net basis. Loss from operations narrowed to $42.1 million in 2004 from $64.0 million in 2003, and the company reports positive operating cash flow. However, it still recorded a net loss of $68.6 million, and management does not expect to reach sustained net income for at least one to two more years.

What drove the improvement in revenue and margins?

Revenue growth came from new customers and expansion from existing customers, with a largely fixed cost base in the IBX centers. Cost of revenues rose only 7% while revenue grew 39%, and management expects incremental revenue to flow through to gross profit at a high rate.

What are the main risks to the investment thesis?

Key risks include continued GAAP losses, rising power and utility costs that customers may not fully pay for, dependence on IBM, dilution and selling pressure from convertible securities and STT's large holdings, the SFAS 123(R) stock-option expense starting in 2006, and the pending outcome of the IPO securities class action.

How does the 2004 debt restructuring change the company's financial position?

Equinix used $86.3 million of convertible debentures to repay its credit facility, senior notes, and other debt. This eliminated the high-interest 13% senior notes and bank debt, lowering interest expense to $11.5 million from $20.5 million. The new debentures carry only a 2.5% coupon, though they are convertible into about 2.2 million shares, and holders can require repurchase in 2009, 2014, and 2019.

Will the January 2005 STT conversion affect shareholders?

Yes. About 4.1 million shares were issued to STT Communications, which eliminated the 14% non-cash interest on the converted notes and reduced future interest expense. It also increased the number of outstanding shares and raised STT's voting stake to about 36%, which may limit the influence of other shareholders over matters requiring stockholder approval.

EQIX 10-K FY2004 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 10, 2005. Cited figures are marked; the original filing is the authoritative source.

Equinix's FY2004 10-K shows a company at an inflection point: revenue grew 39% to $163.7 million^a, operating cash flow turned positive at $36.9 million, and the net loss narrowed to $68.6 million from $84.2 million.

Recurring revenue made up 94%^b of the total, and customer count rose 33% to 950. The business is built on a network-neutral IBX colocation and interconnection model, with fixed-cost centers that the company expects to drive high incremental margins as revenue grows. The balance sheet and financing changed meaningfully during the year.

Equinix refinanced its older 13% senior notes and bank credit facility with $86.3 million^c of 2.5% convertible subordinated debentures due 2024, and it also took on a $35.3 million capital lease for a Washington, D.C. data center. Cash and investments totaled $108.1 million at year-end, and an undrawn $25 million Silicon Valley Bank credit line adds liquidity. In January 2005, 95% of the STT Communications convertible secured notes converted to equity, which removes a roughly 14% non-cash interest burden but raises dilution risk, and STT's stake in voting stock rose to about 36%.

Investors should weigh the improving operating trajectory against continued losses, a $17.7 million^d restructuring charge tied to exiting excess leases, customer concentration (IBM was 13% of revenue), and the company's expectation that it will not reach sustained GAAP profitability for at least one to two more years, partly because of the upcoming expensing of stock options under SFAS 123(R). Equinix also remains exposed to rising power costs and to the securities class action over its 2000 IPO, which is in a settlement process that is not yet final.

02—Key points

Key Highlights

Revenue rose 39% to $163.7 million in 2004 from $117.9 million, with recurring revenue at 94% of the total
Operating cash flow turned positive at $36.9 million, versus a $17.3 million outflow in 2003, and the company has generated positive operating cash flow for six straight quarters
Net loss narrowed to $68.6 million ($3.87 per share) from $84.2 million in 2003, though 2004 included a $16.2 million loss on debt extinguishment and a $17.7 million restructuring charge
Customer count grew 33% to 950, and the weighted-average cabinet utilization rate increased to 45% from 35%
Refinanced high-cost debt with $86.3 million of 2.5% convertible subordinated debentures due 2024, and held $108.1 million in cash and investments at year-end
Customer concentration remains significant: IBM accounted for 13% of 2004 revenue, down from 15% in 2003 and 20% in 2002
STT Communications' voting stake rose to about 36% after the January and February 2005 conversions, giving it substantial control over stockholder votes

03—Questions

Frequently Asked Questions

Is Equinix now profitable on an operating basis?
Not on a GAAP net basis. Loss from operations narrowed to $42.1 million in 2004 from $64.0 million in 2003, and the company reports positive operating cash flow. However, it still recorded a net loss of $68.6 million, and management does not expect to reach sustained net income for at least one to two more years.
What drove the improvement in revenue and margins?
Revenue growth came from new customers and expansion from existing customers, with a largely fixed cost base in the IBX centers. Cost of revenues rose only 7% while revenue grew 39%, and management expects incremental revenue to flow through to gross profit at a high rate.
What are the main risks to the investment thesis?
Key risks include continued GAAP losses, rising power and utility costs that customers may not fully pay for, dependence on IBM, dilution and selling pressure from convertible securities and STT's large holdings, the SFAS 123(R) stock-option expense starting in 2006, and the pending outcome of the IPO securities class action.
How does the 2004 debt restructuring change the company's financial position?
Equinix used $86.3 million of convertible debentures to repay its credit facility, senior notes, and other debt. This eliminated the high-interest 13% senior notes and bank debt, lowering interest expense to $11.5 million from $20.5 million. The new debentures carry only a 2.5% coupon, though they are convertible into about 2.2 million shares, and holders can require repurchase in 2009, 2014, and 2019.
Will the January 2005 STT conversion affect shareholders?
Yes. About 4.1 million shares were issued to STT Communications, which eliminated the 14% non-cash interest on the converted notes and reduced future interest expense. It also increased the number of outstanding shares and raised STT's voting stake to about 36%, which may limit the influence of other shareholders over matters requiring stockholder approval.

04—Continue

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