Is Equinix expected to become profitable soon?

Not in the foreseeable future, according to the 10-K. Management states it does not expect to become net income positive, citing the expensing of stock-based compensation beginning in 2006 and higher depreciation and interest costs from new IBX centers and financings. The company has a full valuation allowance on its deferred tax assets, so it is not recognizing a tax benefit.

What drove the revenue growth in 2005?

Revenue rose 35% to $221.1 million. U.S. revenue increased 34% to $191.4 million and Asia-Pacific revenue increased 34% to $29.7 million. Growth came from higher customer count (up 20% to 1,138), utilization that rose to 54% from 45%, selective price increases, and newly opened Washington D.C. and Silicon Valley IBX centers.

How concentrated is the customer base?

IBM was the largest customer at 11% of 2005 revenue, down from 13% in 2004 and 15% in 2003. No other customer exceeded 10%. The 10-K notes that IBM has the right to reduce its commitment under its customer agreement even though the contract runs through 2011, so loss or reduction of IBM would materially affect results.

What are the main risks around new capital investments?

The company is spending heavily on acquired and new IBX centers, often committing resources 12 to 18 months before securing customer contracts. Key risks include insufficient customer demand, power constraints as customers draw more power per cabinet, greenfield construction delays and costs, and reliance on carriers to connect to new facilities. Management expects cash used in investing to exceed operating cash flow through 2006.

What is the status of the IPO securities class action?

Equinix is a defendant in IPO allocation-related securities class action suits filed in 2001. A settlement with the issuer defendants was preliminarily approved in February 2005 but still requires final court approval. The company estimates its potential exposure at less than approximately $3.4 million and expects insurance to cover it, and it has not accrued a liability.

EQIX 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 16, 2006. Cited figures are marked; the original filing is the authoritative source.

Equinix (EQIX) reported FY2005 results in its 10-K filed March 16, 2006, showing continued top-line growth and a narrowing path toward profitability, though the company remained in net loss.

Revenues rose 35% to $221.1 million^a from $163.7 million, with recurring revenues (colocation, interconnection and managed infrastructure) at 94% of the total. Net loss improved to $42.6 million from $68.6 million, or $(1.78) per share, helped by higher revenue and the absence of the prior year's $16.2 million debt extinguishment loss, but partly offset by a $33.8 million restructuring charge tied to exiting the San Jose ground lease. Operating cash flow more than doubled to $67.6 million, and cash plus investments totaled $188.9 million at year-end.

Management signaled that the investment phase is intensifying. The company completed several IBX acquisitions in 2005 (Silicon Valley, Chicago, Los Angeles, and the Ashburn, Virginia campus), and announced new builds in the Washington, D.C. and Chicago metros. Investing cash outflows are expected to exceed operating cash flow in 2006, and interest expense is expected to rise because of new financings.

Management also warned that stock-based compensation expense will increase materially under SFAS 123(R) beginning in 2006, which will weigh on near-term reported profitability. The key investor considerations are concentration risk (IBM was 11%^b of revenue), power constraints in aging IBX centers, a full valuation allowance on deferred tax assets, the lengthy legacy IPO securities class action, and Section 382 limits on NOL usage. The 10-K also notes that the company does not expect to be net income positive in the foreseeable future, so the investment case rests on continued revenue growth from network effects and operating leverage on a largely fixed cost base.

02—Key points

Key Highlights

Revenue grew 35% year over year to $221.1 million, with recurring revenues at 94% of total revenue and 1,138 customers at year-end (up 20%).
Net loss narrowed to $42.6 million ($1.78 per share) from $68.6 million in 2004, though 2005 included a $33.8 million restructuring charge for the San Jose ground lease exit.
Operating cash flow rose to $67.6 million from $36.9 million, and the company has reported positive operating cash flow since Q3 2003.
Cash, cash equivalents and investments were $188.9 million at December 31, 2005, plus $13.3 million of available credit under a $50 million Silicon Valley Bank revolver.
Capital spending is accelerating: 2005 acquisitions included Ashburn campus ($53.8M), Los Angeles IBX ($34.7M), and several financed IBX centers, with new Washington D.C. and Chicago builds planned for 2006-2007 and investing outflows expected to exceed operating cash flow.
IBM accounted for 11% of 2005 revenue (down from 13% in 2004), and the company has a full valuation allowance against deferred tax assets, with NOL usage restricted under Section 382.
Stock-based compensation will be expensed under SFAS 123(R) starting Q1 2006, which management expects to be significant; the 2005 pro forma charge would have been $32.7 million.

03—Questions

Frequently Asked Questions

Is Equinix expected to become profitable soon?
Not in the foreseeable future, according to the 10-K. Management states it does not expect to become net income positive, citing the expensing of stock-based compensation beginning in 2006 and higher depreciation and interest costs from new IBX centers and financings. The company has a full valuation allowance on its deferred tax assets, so it is not recognizing a tax benefit.
What drove the revenue growth in 2005?
Revenue rose 35% to $221.1 million. U.S. revenue increased 34% to $191.4 million and Asia-Pacific revenue increased 34% to $29.7 million. Growth came from higher customer count (up 20% to 1,138), utilization that rose to 54% from 45%, selective price increases, and newly opened Washington D.C. and Silicon Valley IBX centers.
How concentrated is the customer base?
IBM was the largest customer at 11% of 2005 revenue, down from 13% in 2004 and 15% in 2003. No other customer exceeded 10%. The 10-K notes that IBM has the right to reduce its commitment under its customer agreement even though the contract runs through 2011, so loss or reduction of IBM would materially affect results.
What are the main risks around new capital investments?
The company is spending heavily on acquired and new IBX centers, often committing resources 12 to 18 months before securing customer contracts. Key risks include insufficient customer demand, power constraints as customers draw more power per cabinet, greenfield construction delays and costs, and reliance on carriers to connect to new facilities. Management expects cash used in investing to exceed operating cash flow through 2006.
What is the status of the IPO securities class action?
Equinix is a defendant in IPO allocation-related securities class action suits filed in 2001. A settlement with the issuer defendants was preliminarily approved in February 2005 but still requires final court approval. The company estimates its potential exposure at less than approximately $3.4 million and expects insurance to cover it, and it has not accrued a liability.

04—Continue

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