October 25, 2006
Equinix Reports Third Quarter 2006 Results
Foster City, CA — October 25, 2006 — Equinix, Inc. (Nasdaq: EQIX), the leading provider of network-neutral data centers and Internet exchange services, today reported quarterly results for the period ended September 30, 2006.
Revenues were $73.7 million for the third quarter, a 27% increase over the same quarter last year and an 8% increase over the previous quarter. Recurring revenues, consisting primarily of colocation, interconnection and managed services, were $69.9 million, a 29% increase over the same quarter last year and a 7% increase over the previous quarter. Non-recurring revenues were $3.8 million in the quarter, consisting primarily of professional services and installation fees.
Note: Equinix uses non-GAAP financial measures, such as EBITDA, cash cost of revenues, cash gross margins, cash operating expenses (also known as cash selling, general and administrative expenses or cash SG&A), non-GAAP net income (loss), free cash flow and adjusted free cash flow to evaluate its operations. A reconciliation of these non-GAAP financial measures to the most closely applicable GAAP financial measure is attached to this release and commences at the bottom of our condensed consolidated statements of operations - GAAP presentation.
Cost of revenues were $49.1 million for the third quarter, including $664,000 of stock-based compensation, an 8% increase over the previous quarter and a 20% increase over the same quarter last year. Cost of revenues, excluding depreciation, amortization, accretion and stock-based compensation of $19.4 million, were $29.7 million for the third quarter, an 11% increase over the previous quarter and an 18% increase over the same quarter last year. Cash gross margins, defined as gross profit less depreciation, amortization, accretion and stock-based compensation, divided by revenues, for the quarter were 60%, down from 61% the previous quarter and up from 57% the same quarter last year. On a same IBX basis (defined as IBX centers which have been available for new customer installs for at least four full quarters), cash gross margins were 63%.
Selling, general and administrative expenses were $26.1 million for the third quarter, including $6.2 million of stock-based compensation, approximately the same as the previous quarter and a 55% increase over the same quarter last year. Selling, general and administrative expenses, excluding depreciation, amortization and stock-based compensation of $7.1 million, were $19.0 million for the third quarter, an 8% increase over the previous quarter and a 27% increase over same quarter last year. Selling, general and administrative expenses included $1.2 million in costs incurred in the quarter related to the audit committee's independent investigation of the Company's stock options practices, of which approximately $600,000 was greater than anticipated.
The Company recorded an adjustment to the $17.7 million restructuring charge that the Company recorded in the fourth quarter of 2004 and increased the restructuring charge by $1.5 million in the third quarter of 2006. The $1.5 million increase in the restructuring charge was a result of revised sublease assumptions related to the two leases covered under the 2004 restructuring charge that the Company is contractually committed to through 2015.
Net loss for the third quarter was $5.2 million, including stock-based compensation expense of $6.9 million and the restructuring charge of $1.5 million. This represents a basic and diluted net loss per share of $0.18 based on a weighted average share count of 28.7 million. Excluding stock-based compensation and the restructuring charge, the Company was net income positive for the third quarter, with a non-GAAP net income of $3.2 million. This was a $383,000 decrease from the previous quarter's result of $3.6 million and a $2.7 million improvement over the same quarter last year.
EBITDA, defined as income or loss from operations before depreciation, amortization, accretion, stock-based compensation expense and restructuring charges, for the third quarter was $24.9 million, up from $24.0 million the previous quarter and up from $17.9 million the same quarter last year. As mentioned above, this result included $1.2 million in costs incurred within the quarter for the audit committee's independent investigation of the Company's stock options practices, of which approximately $600,000 was not anticipated.
“With good visibility to the completion of 2006, it's been another strong year of growth for the Company,” said Peter Van Camp, chairman and CEO, Equinix. “Our business execution, expansion program, and momentum as we exit the year provide a solid foundation to continue to build on our market leadership position in 2007.”
Capital expenditures in the third quarter were $46.6 million, of which $7.0 million was attributed to ongoing capital expenditures and $39.6 million was attributed to expansion capital expenditures.
The Company generated cash from operating activities of $20.7 million as compared to $16.1 million in the previous quarter. Cash used in investing activities was $50.0 million as compared to $35.8 million in the previous quarter. Adjusted free cash flow was a negative $29.3 million in the third quarter. Adjusted free cash flow is defined as net cash generated from operating activities less net cash used in investing activities (excluding the purchases, sales and maturities of short-term and long-term investments and the purchase and sale of real estate).
As of September 30, 2006, the Company's cash, cash equivalents and investments were $166.3 million, as compared to $147.9 million in the previous quarter. In September 2006, the Company drew down $40.0 million from its Silicon Valley Bank credit line, which was repaid in full in October 2006.
Other Company Developments & Metrics
As referenced in a separate press release today, Equinix has announced that Peter Van Camp will transition from his role as chairman and CEO of Equinix to Executive Chairman once a new CEO has been appointed over the course of the next year. Until this time, Mr. Van Camp will remain fully engaged as CEO and chairman.
On a same IBX basis (defined as IBX centers which have been available for new customer installs for at least four full quarters), revenues were $71.6 million; cost of revenues were $43.5 million; cost of revenues, excluding depreciation, amortization, accretion and stock-based compensation, were $26.4 million and cash gross margins for the quarter were 63%. EBITDA on a same IBX basis was $26.6 million.
Equinix added 92 new customers in the quarter including Acer Computers, Barnes and Noble College Booksellers, Coram, Fannie Mae and Shopzilla.
Based on a total cabinet capacity of approximately 30,900, the number of cabinets billing at the end of the quarter was approximately 16,200, or 52%, up from approximately 15,400 the previous quarter. On a weighted average basis, the number of cabinets billing was approximately 16,200 representing a utilization rate of 52%.
U.S. interconnection service revenues were 22% of U.S. recurring revenues for the quarter. Interconnection services represent approximately 20% of total worldwide recurring revenues.
Washington, D.C. metro area IBX greenfield project is targeted to open in January of 2007, with customer installations expected to commence in February 2007.
For the full year of 2006, total revenues are expected to be in the range of $286.0 to $287.0 million. Total year cash gross margins are expected to be in the range of 60% to 61% including approximately $4.0 million of net cash costs attributed to our expansion IBXs. Cash selling, general and administrative expenses are expected to be in the range of $70.0 to $71.0 million, including an estimated $2.7 million of incremental professional fees attributed to the stock option investigation. EBITDA for the year is expected to be $102.0 to $103.0 million. Net loss is expected to be in a range of $15.0 to $16.0 million, including the restructuring charge of $1.5 million and the impact of approximately $30.0 million of stock-based compensation expense. Net interest expense will be approximately $8.0 million. The weighted average shares outstanding will be approximately 28.5 million. Capital expenditures for 2006 are expected to be in a range of $175.0 to $180.0 million, comprised of approximately $32.0 million of ongoing capital expenditures and $143.0 to $148.0 million of expansion capital expenditures for the build out of the Chicago, Los Angeles and Silicon Valley expansions opened this year, as well as the greenfield expansions in the Washington, D.C., Chicago and New York metro areas.
For 2007, total revenues are expected to be in the range of $352.0 to $362.0 million. EBITDA for the year is expected to be between $137.0 and $143.0 million, including $6.0 million of net costs related to the Company's expansion projects. Capital expenditures for 2007 are expected to be in a range of $230.0 to $245.0 million, comprised of approximately $30.0 million of ongoing capital expenditures and $200.0 to $215.0 million of expansion capital expenditures. This includes approximately $10.0 million of expansion capital expenditures shifted from 2006 to 2007 specifically related to the Chicago Greenfield project.
Equinix is the leading global provider of network-neutral data centers and Internet exchange services for enterprises, content companies, systems integrators and network services providers. Through the company's Internet Business Exchange™ (IBX®) centers in 11 markets in the U.S. and Asia, customers can directly interconnect with every major global network and ISP for their critical peering, transit and traffic exchange requirements. These interconnection points facilitate the highest performance and growth of the Internet by serving as neutral and open marketplaces for Internet infrastructure services, allowing customers to expand their businesses while reducing costs.
Equinix and IBX are registered trademarks of Equinix, Inc. Internet Business Exchange is a trademark of Equinix, Inc.
Non-GAAP Financial Measures
Equinix continues to provide all information required in accordance with generally accepted accounting principles (GAAP), but it believes that evaluating its ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, Equinix uses non-GAAP financial measures, such as EBITDA, cash cost of revenues, cash gross margins, cash operating expenses (also known as cash selling, general and administrative expenses or cash SG&A), non-GAAP net income (loss), free cash flow and adjusted free cash flow to evaluate its operations. In presenting these non-GAAP financial measures, Equinix excludes certain non-cash or non-recurring items that it believes are not good indicators of the Company's current or future operating performance. These non-cash or non-recurring items are depreciation, amortization, accretion, stock-based compensation and restructuring charges. Recent legislative and regulatory changes encourage use of and emphasis on GAAP financial metrics and require companies to explain why non-GAAP financial metrics are relevant to management and investors. Equinix excludes these non-cash or non-recurring items in order for Equinix's lenders, investors, and industry analysts who review and report on the Company, to better evaluate the Company's operating performance and cash spending levels relative to its industry sector and competitor base.
Equinix excludes depreciation expense as these charges primarily relate to the initial construction costs of our IBX centers and IBX expansion projects or acquired IBX centers and do not reflect our current or future cash spending levels to support our business. Our IBX centers are long-lived assets, and have an economic life greater than ten years. The construction costs of our IBX centers do not recur and future capital expenditures remain minor relative to our initial investment. This is a trend we expect to continue. In addition, depreciation is also based on the estimated useful lives of our IBX centers. These estimates could vary from actual performance of the asset, are based on historic costs incurred to build out our IBX centers, and are not indicative of current or expected future capital expenditures. Therefore, Equinix excludes depreciation from its operating results when evaluating its operations.
In addition, in presenting the non-GAAP financial measures, Equinix excludes amortization expense related to certain intangible assets, as it represents a non-cash cost that may not recur and is not a good indicator of the Company's current or future operating performance. Equinix excludes accretion expense, both as it relates to its asset retirement obligations as well as its accrued restructuring charge liabilities, as these expenses represent costs, which Equinix believes are not meaningful in evaluating the Company's current operations. Equinix excludes non-cash stock-based compensation expense as it represents expense attributed to stock awards that have no current or future cash obligations. As such, we, and our investors and analysts, exclude this stock-based compensation expense when assessing the cash generating performance of our operations. The restructuring charges relate to the Company's decision to exit leases for excess space adjacent to several of our IBX centers, which we do not intend to build out now or in the future. Management believes such restructuring charges were unique costs that are not expected to recur, and consequently, does not consider these charges as a normal component of expenses related to current and ongoing operations.
Our management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. However, we have presented such non-GAAP financial measures to provide investors with an additional tool to evaluate our operating results in a manner that focuses on what management believes to be our ongoing business operations. Management believes that the inclusion of these non-GAAP financial measures provide consistency and comparability with past reports and provide a better understanding of the overall performance of the business and its ability to perform in subsequent periods. Equinix believes that if it did not provide such non-GAAP financial information, investors would not have all the necessary data to analyze Equinix effectively.
Investors should note, however, that the non-GAAP financial measures used by Equinix may not be the same non-GAAP financial measures, and may not be calculated in the same manner, as that of other companies. In addition, whenever Equinix uses such non-GAAP financial measures, it provides a reconciliation of non-GAAP financial measures to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure.
Equinix does not provide forward-looking guidance for certain financial data, such as depreciation, amortization, accretion, net income (loss) from operations, interest income, cash generated from operating activities and cash used in investing activities, and as a result, is not able to provide a reconciliation of GAAP to non-GAAP financial measures for forward-looking data. Equinix intends to calculate the various non-GAAP financial measures in future periods consistent with how it was calculated for the three and nine months ended September 30, 2006 and 2005, presented within this press release.
Forward Looking Statements
This press release contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from expectations discussed in such forward-looking statements. Factors that might cause such differences include, but are not limited to, the challenges of acquiring, operating and constructing IBX centers and developing, deploying and delivering Equinix services; unanticipated costs or difficulties relating to the integration of IXEurope into Equinix; a failure to receive significant revenue from customers in recently built out data centers; failure to complete any financing arrangements contemplated from time to time; competition from existing and new competitors; the ability to generate sufficient cash flow or otherwise obtain funds to repay new or outstanding indebtedness; the loss or decline in business from our key customers; the results of any litigation relating to past stock option grants and practices; and other risks described from time to time in Equinix's filings with the Securities and Exchange Commission. In particular, see Equinix's recent quarterly and annual reports filed with the Securities and Exchange Commission, copies of which are available upon request from Equinix. Equinix does not assume any obligation to update the forward-looking information contained in this press release.
Equinix and IBX are registered trademarks of Equinix, Inc. Internet Business Exchange is a trademark of Equinix, Inc.