Is Equinix now profitable?

Not on a net basis yet. In 2006 Equinix posted operating income of $1.9 million, its first positive year from operations, but a net loss of $6.4 million ($0.22 per share) remained after $14.9 million of interest expense. The one-time $9.6 million Honolulu gain was a key factor in narrowing the loss. Management says it is approaching breakeven but cannot guarantee sustained profitability.

How is Equinix funding its expansion?

Through a mix of cash, debt and new financing. At year-end it held $156.5 million in cash and investments and had $58.6 million available under its $75 million revolver. In February 2007 it obtained a $110 million Chicago construction loan, and it expects at least 60% of New York build-out costs to come from financing. Management expects investing outflows to exceed operating cash flow in coming years.

What are the main risks to the investment case?

Key risks include: expansion capital that may not earn returns if customer demand lags; concentration in IBM (about 9% of revenue) and the top 10 customers (25%); power limitations at IBX centers; pending shareholder and derivative litigation tied to stock option practices; the Nasdaq audit committee deficiency; and STT Communications' roughly 15% voting control.

Why did stock-based compensation rise so much?

Equinix adopted SFAS 123(R) on January 1, 2006, requiring expense recognition for stock options and ESPP shares at fair value. Stock-based compensation expense reached $30.8 million in 2006, versus $8.3 million in 2005. Management also noted an additional $444,000 charge from correcting historical option measurement dates.

What is the status of the stock option investigation and legal matters?

The SEC terminated its informal investigation in December 2006 with no enforcement action recommended, and the U.S. Attorney withdrew its grand jury subpoena in January 2007. However, shareholder derivative suits in California state and federal courts remain pending. The IPO securities class action is also still unresolved, with a court-approved settlement pending and insurers expected to cover most costs, and the company does not expect to pay out of pocket.

EQIX 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 28, 2007. Cited figures are marked; the original filing is the authoritative source.

Equinix (EQIX) closed fiscal 2006 with revenue of $286.9 million^a, up 30% from $221.1 million in 2005, and its first full year of positive operating income: $1.9 million from operations versus a $36.8 million loss in 2005.

Net loss narrowed to $6.4 million^b ($0.22 per share) from $42.6 million, helped by a $9.6 million gain on the sale of the Honolulu IBX center. Recurring revenues made up 95% of the total, and operating cash flow rose to $75.4 million. Growth came from a 13% increase in customers to 1,290 and a 56% cabinet utilization rate, up from 54%.

Stock-based compensation under SFAS 123(R) rose to $30.8 million^c, which weighed on margins. The company is in a heavy build-out phase. Investing cash outflow was $158.5 million, mainly for new IBX centers in Washington D.C., Chicago, New York and Tokyo, with about $94.6 million of contractual capital commitments at year-end and management expecting roughly $160–170 million more in 2007.

To fund this, Equinix had $156.5 million^d of cash and investments, $58.6 million of available revolver capacity, and a new $110 million Chicago construction loan. Total debt is substantial, including $86.3 million of 2.5% convertible debentures and roughly $194 million of non-convertible financing, so investors should weigh expansion returns against leverage and the risk of insufficient customer demand. Governance and legal risks are elevated.

The company disclosed a stock option backdating review that found measurement-date errors, which led to a $444,000 charge, along with pending shareholder derivative suits. It also received a Nasdaq deficiency notice after its audit chairman resigned, leaving the audit committee non-compliant and facing a cure deadline of August 8, 2007.

IBM accounted for about 9% of revenue, and the top 10 customers for 25%. STT Communications holds about 15% voting control.

02—Key points

Key Highlights

Revenue grew 30% to $286.9 million in 2006, with recurring revenues at 95% of the total.
First year of positive operating income ($1.9 million) versus a $36.8 million operating loss in 2005; net loss narrowed to $6.4 million from $42.6 million, aided by a $9.6 million Honolulu IBX sale gain.
Operating cash flow of $75.4 million, the fourth consecutive quarter-by-quarter positive trend since Q3 2003, though investing outflows of $158.5 million reflect heavy expansion spending.
Customer count rose 13% to 1,290; cabinet utilization reached 56% (63% excluding recently opened centers), with management citing a 75–80% practical maximum.
Major expansion projects in Washington D.C., Chicago, New York and Tokyo, with about $94.6 million contractually committed and roughly $160–170 million more expected in 2007.
Stock-based compensation jumped to $30.8 million under SFAS 123(R), and a stock option review led to a $444,000 charge and pending derivative lawsuits.
Nasdaq deficiency: the audit committee lost its independent financial expert and chairman, with a cure deadline of August 8, 2007, or delisting risk.

03—Questions

Frequently Asked Questions

Is Equinix now profitable?
Not on a net basis yet. In 2006 Equinix posted operating income of $1.9 million, its first positive year from operations, but a net loss of $6.4 million ($0.22 per share) remained after $14.9 million of interest expense. The one-time $9.6 million Honolulu gain was a key factor in narrowing the loss. Management says it is approaching breakeven but cannot guarantee sustained profitability.
How is Equinix funding its expansion?
Through a mix of cash, debt and new financing. At year-end it held $156.5 million in cash and investments and had $58.6 million available under its $75 million revolver. In February 2007 it obtained a $110 million Chicago construction loan, and it expects at least 60% of New York build-out costs to come from financing. Management expects investing outflows to exceed operating cash flow in coming years.
What are the main risks to the investment case?
Key risks include: expansion capital that may not earn returns if customer demand lags; concentration in IBM (about 9% of revenue) and the top 10 customers (25%); power limitations at IBX centers; pending shareholder and derivative litigation tied to stock option practices; the Nasdaq audit committee deficiency; and STT Communications' roughly 15% voting control.
Why did stock-based compensation rise so much?
Equinix adopted SFAS 123(R) on January 1, 2006, requiring expense recognition for stock options and ESPP shares at fair value. Stock-based compensation expense reached $30.8 million in 2006, versus $8.3 million in 2005. Management also noted an additional $444,000 charge from correcting historical option measurement dates.
What is the status of the stock option investigation and legal matters?
The SEC terminated its informal investigation in December 2006 with no enforcement action recommended, and the U.S. Attorney withdrew its grand jury subpoena in January 2007. However, shareholder derivative suits in California state and federal courts remain pending. The IPO securities class action is also still unresolved, with a court-approved settlement pending and insurers expected to cover most costs, and the company does not expect to pay out of pocket.

04—Continue

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