Equinix
Annual Report 2010

Plain-text annual report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2010 OR ‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 000-31293 EQUINIX, INC. (Exact name of registrant as specified in its charter) Delaware (State of incorporation) 77-0487526 (IRS Employer Identification No.) One Lagoon Drive, Fourth Floor, Redwood City, California 94065 (Address of principal executive offices, including ZIP code) (650) 598-6000 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock, $0.001 Name of each exchange on which registered The NASDAQ Stock Market LLC Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Act. È Yes ‘ No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ‘ Yes È No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. È Yes ‘ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). È Yes ‘ No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. È Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer È Non-accelerated filer ‘ Accelerated filer ‘ Smaller reporting company ‘ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ‘ Yes È No The aggregate market value of the voting and non-voting common stock held by non-affiliates computed by reference to the price at which the common stock was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter was approximately $3.7 billion. As of January 31, 2011, a total of 46,198,990 shares of the registrant’s common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III—Portions of the registrant’s definitive proxy statement to be issued in conjunction with the registrant’s 2011 Annual Meeting of Stockholders, which is expected to be filed not later than 120 days after the registrant’s fiscal year ended December 31, 2010. Except as expressly incorporated by reference, the registrant’s proxy statement shall not be deemed to be a part of this report on Form 10-K. EQUINIX, INC. FORM 10-K DECEMBER 31, 2010 TABLE OF CONTENTS PART I Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [Removed and reserved] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1. 1A. 1B. 2. 3. 4. PART II 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of 6. 7. 7A. 8. 9. 9A. 9B. 10. 11. 12. 13. 14. 15. Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page No. 3 13 29 29 29 31 32 34 35 64 67 67 67 68 69 69 69 69 69 70 75 76 2 ITEM 1. BUSINESS PART I The words “Equinix”, “we”, “our”, “ours”, “us” and the “Company” refer to Equinix, Inc. All statements in this discussion that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding Equinix’s “expectations”, “beliefs”, “intentions”, “strategies”, “forecasts”, “predictions”, “plans” or the like. Such statements are based on management’s current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Equinix cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risk factors discussed in this Annual Report on Form 10-K. Equinix expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in Equinix’s expectations with regard thereto or any change in events, conditions, or circumstances on which any such statements are based. Overview Equinix connects businesses with partners and customers around the world through a global platform of high performance data centers, containing dynamic ecosystems and a broad choice of networks. More than 3,275 enterprise, cloud, digital content and financial companies connect to more than 625 network service providers and rely on Platform Equinix to grow their business, improve application performance and protect their vital digital assets. Equinix operates in 35 strategic markets across North America, Europe and Asia-Pacific and continually invests in expanding its platform to power customer growth. Platform Equinix™ combines state-of-the-art International Business Exchange® (IBX®) data centers, a global footprint and unique ecosystems. Together these components accelerate business growth for Equinix’s customers by safeguarding their infrastructure, housing their assets and applications closer to users to improve performance and enabling them to collaborate with the widest variety of partners and customers. Equinix’s platform offers these unique value propositions to customers: • Reliability—Equinix delivered more than 99.9999% of uptime across its footprint in 2010. • Scalability—A wide worldwide availability, six million square feet and growing, to ensure customers’ operations can scale. • Global reach—A broad footprint of 92 data centers across 35 key markets in 4 continents. • Choice—A great aggregation of 625 networks to ensure performance and offer the power of choice. • Technology—Over 3,900 potential technology partners to deploy world-class solutions. • Proximity—More than 90% of the population of North America and Western Europe is located less than 10 milliseconds of network latency from an Equinix facility. Equinix also has sites in the key business centers of Asia Pacific. Equinix has established a critical mass of customers which continues to drive new and existing customer growth and bookings. A supply and demand imbalance in the data center market has also contributed to Equinix’s revenue growth. In addition, as a result of a largely fixed cost model, any growth in revenue would likely drive incremental margins and increased operating cash flow; however, the costs of a new IBX data center have a negative effect on earnings until the data center generates sufficient revenues to cover these costs. Our network-neutral business model contributes to our success in the market. We offer customers direct interconnection to an aggregation of bandwidth providers, rather than focusing on selling a particular network, 3 including the world’s top carriers, Internet Service Providers (ISPs), broadband access networks (DSL / cable) and international carriers. Neutrality also means our customers can choose to buy from, or partner, with leading companies across our five targeted verticals. These include: • Network Providers (AT&T, British Telecom, Comcast, Level 3 Communications, NTT, Qwest, SingTel, Sprint, Verizon Business) • Cloud and IT Services (Amazon.com, Carpathia, Microsoft, Citrix, IBM, Salesforce.com, Voxel.net, WebEx) • Content Providers (eBay, DIRECTV, Facebook, Google, Hulu, SONY Yahoo!, Zynga) • Enterprise (Booz Allen Hamilton, Barnes & Noble, Bechtel, Deloitte & Touche, GAP, The McGraw- Hill Companies, United Stationers Inc, Wellpoint) • Financial Companies (ACTIV Financial, Bloomberg, Box.net, CBOE, DirectEdge, JP Morgan Chase, Quantlab Financial, Thomson Reuters) Equinix generates revenue by selling colocation, interconnection and managed IT infrastructure services on a global platform of 92 IBX data centers. • Colocation services include cabinets, power, operations space and storage space for customers’ colocation needs. • Interconnection services include cross connects, as well as switch ports on the Equinix Internet Exchange and Equinix Carrier Ethernet Exchange services. These services provide scalable and reliable connectivity that allows customers to exchange traffic directly with the service provider of their choice or directly with each other, creating a performance optimized business ecosystem for the exchange of data between strategic partners. • Managed IT infrastructure services allow customers to leverage Equinix’s significant telecommunications expertise, maximize the benefits of our IBX data centers and optimize their infrastructure and resources. The market for Equinix’s services has historically been served by large telecommunications carriers which have bundled their telecommunications and managed services with their colocation offerings. In addition, some Equinix customers, such as Google and Microsoft, build and operate their own data centers for their large infrastructure deployments, called server farms. However, these customers rely upon Equinix IBX data centers for many of their critical interconnection relationships. The need for large, wholesale outsourced data centers is also being addressed by real estate investment trusts (REITs) that build large data centers to meet customers’ needs for standalone data centers, a different customer segment than Equinix serves. However, with the increasing cost and complexity of the power and cooling requirements of today’s data center equipment, there continues to be a supply and demand imbalance in the market. The supply and demand imbalance in the industry has, to date, created a favorable pricing environment for Equinix, as well as an opportunity to increase market share. Equinix has gained many customers that have outgrown their existing data centers or that have realized the benefits of a network-neutral model and the ability to create their own optimized business ecosystems for the exchange of data. Strategically, we will continue to look at attractive opportunities to grow market share and selectively expand our footprint and service offerings. We continue to leverage our global reach and depth to differentiate based upon our ability to support truly global customer requirements in all our markets. 4 Several factors contribute to the growth in demand for data center services, including: • The continuing growth of consumer Internet traffic from new bandwidth-intensive services, such as video, VoIP, social media, mobile data, gaming, data-rich media, Ethernet and wireless services. • Significant increases in power and cooling requirements for today’s data center equipment. Servers have increased the overall level of power consumed and heat generation by more than two times since 2000 and many legacy-built data centers are unable to accommodate new power and cooling demands. • The growth of enterprise applications delivered across communications networks, such as Software-as-a-Service (SaaS), and disaster recovery, and the adoption of cloud computing technology services. • The financial services market is experiencing tremendous growth with the shift to electronic trading and increased volume of peak messages (transactions per second), requiring optimized data exchange through business ecosystems. • The growth of “proximity communities” that rely on immediate physical colocation and interconnection with their strategic partners and customers, such as financial exchange ecosystems for electronic trading and settlement. • The high capital costs associated with building and maintaining “in-sourced” data centers creates an opportunity for capital savings by leveraging an outsourced colocation model. Industry Background The Internet is a collection of numerous independent networks interconnected to form a network of networks. Users on different networks are able to communicate with each other through interconnection services between these networks. For example, when a person sends an email to someone that uses a different provider for his or her connectivity (e.g., Comcast versus Verizon), the email must pass from one network to the other in order to get to its final destination. Equinix provides a physical point at which that interconnection can occur. In order to accommodate the rapid growth of Internet traffic, an organized approach for network interconnection was needed. The exchange of traffic between these networks became known as peering. Peering is when networks trade traffic at relatively equal amounts and set up agreements to trade traffic often at no charge to the other party. At first, government and non-profit organizations established places where these networks could exchange traffic, or peer, with each other—these points were known as network access points, or NAPs. Over time, many NAPs became a natural extension of carrier services and were run by such companies as MFS (now a part of Verizon Business), Sprint, Ameritech and Pacific Bell (the last two now parts of AT&T). Ultimately, these NAPs were unable to scale with the growth of the Internet, and the lack of “neutrality” by the carrier owners of these NAPs created a conflict of interest with the participants. This created a market need for network-neutral interconnection points that could accommodate the rapidly growing need to increase performance for enterprise and consumer users of the Internet, especially with the rise of important content providers such as AOL, Google, Microsoft, Yahoo! and others. In addition, the providers, as well as a growing number of enterprises, required a more secure and reliable solution for direct connection to a variety of telecommunications networks as the importance of their Internet operations continued to grow. To accommodate Internet traffic growth, the largest of these networks left the NAPs and began trading traffic by placing private circuits between each other. Peering, which once occurred at the NAP locations, was moved to these private circuits. Over the years, these circuits became expensive to expand and could not be built quickly enough to accommodate traffic growth. This led to a need by the large carriers to find a more efficient way to exchange network traffic or peer. As a result, many customers satisfy their requirements for peering through data center service providers like Equinix because it permits them to peer with the networks they require within one location, using simple direct connections. Their ability to peer across the room or data center campus, instead of across a metro area, has increased the scalability of their operations while decreasing network costs. 5 The interconnection model has further evolved over the years to include new services offerings. Starting with the peering and network communities, interconnection has since been used for new network services including carrier Ethernet, MPLS, VPN and mobility services, in addition to traditional international private line and voice services. The industry continues to evolve with a set of new service offerings where interconnection is often used to solve the network-to-network interconnection challenges. In addition, the enterprise customer segment is also evolving. In the past, most enterprises opted to keep their data center requirements in house. However, several recent trends have led more and more enterprise CIOs to consider and/or choose to outsource some or all of their data center requirements. The combination of globalization, the proliferation of bandwidth intensive Internet-facing applications and rich media content, the rise of virtualization and cloud computing, business continuity and disaster recovery needs, and most importantly the recent economic downturn, have meant that enterprise CIOs must increasingly try to do more with less. Meanwhile, the biggest challenge for data center and operations managers is being out of data center space and power. With the typical in-house datacenter ranging in size from 2,000 to 40,000 square feet, and with very limited optical fiber availability, many CIOs struggle to find the necessary capital, in the current economic environment, to build out and connect their existing facilities. This is why many industry analysts forecast the colocation market to grow over the next three years at more than an approximately 20% compounded annual growth rate. Thus the scope of the industry for colocation has expanded in terms of market opportunity. Equinix Value Proposition More than 3,900 companies, including a diversified mix of cloud and IT service providers, content providers, enterprises, financial companies, and network service providers, currently operate within Equinix IBX data centers. These companies derive specific value from the following elements of the Equinix service offering: • Comprehensive global service offering: With 92 IBX data centers in 35 markets in the North America, Europe and Asia-Pacific, Equinix offers a consistent global service. • Premium data centers: Equinix IBX data centers feature advanced design, security, power and cooling elements to provide customers with industry-leading reliability. While others in the market have business models that include additional offerings, Equinix is focused on data center services and interconnection as our core competencies. • Dynamic business ecosystems: Equinix’s network-neutral model has enabled us to attract a critical mass of networks that, in turn, attracts other businesses seeking to interconnect within a single location. This ecosystem model, versus connecting to multiple partners in disparate locations, reduces costs and optimizes the performance of data exchange. As Equinix grows and attracts an even more diversified base of customers, the value of Equinix’s IBX data center offering increases. • Improved economics: Customers seeking to outsource their data center operations rather than build their own capital-intensive data centers enjoy significant capital cost savings in this credit-challenged economic environment. Customers also benefit from improved economics on account of the broad access to networks that Equinix provides. Rather than purchasing costly local loops from multiple transit providers, customers can connect directly to more than 625 networks inside Equinix’s IBX data centers. • Leading insight: With more than 10 years of industry experience, Equinix has a specialized staff of industry experts who helped build and shape the interconnection infrastructure of the Internet. This specialization and industry knowledge base offer customers a unique consultative value and a competitive advantage. 6 Our Strategy Our objective is to expand our global leadership position as the premier network neutral data center operator for cloud and IT services providers, content providers, financial companies, enterprises and network services providers. Key components of our strategy include the following: Improve customer performance through interconnection. We have assembled a critical mass of premier network providers and content companies and have become one of the core hubs of the information-driven world. This critical mass is a key selling point for companies that want to connect with a diverse set of networks to provide the best connectivity to their end-customers and network companies that want to sell bandwidth to companies and interconnect with other networks in the most efficient manner available. Currently, we service more than 625 unique networks, including all of the top tier networks, allowing our customers to directly interconnect with providers that serve more than 90% of global Internet routes. We have a growing mass of key players in the cloud and IT services, enterprise and financial sectors, such as Bank of America, The GAP, Gannett Company, Inc., IBM, Salesforce.com, Sony and others. We expect these segments will continue to grow as they seek to leverage our critical mass of network providers and interconnect directly with each other to improve performance. Streamline ease of doing business globally. Data center reliability, power availability and network choice are the most important attributes considered by our customers when they are choosing a data center provider in a particular location. We have long been recognized as a leader in these areas and our performance continues to improve against these criteria. Our power infrastructure delivered 99.9999% uptime globally in 2010. In 2010, more than half of our revenue came from customers with deployments across two or more of our global regions, and as globalization continues, seamless global services will become an increasingly important data center selection criteria. We are currently rolling out global product, pricing and contracts harmonization initiatives to meet these global demands. Deepen existing and grow new ecosystems. As networks, cloud and IT services providers, content providers, financial services providers and enterprises locate in our IBX data centers, it benefits their suppliers and business partners to do so as well to gain the full economic and performance benefits of direct interconnection for their business ecosystems. These partners, in turn, pull in their business partners, creating a “network effect” of customer adoption. Our interconnection services enable scalable, reliable and cost-effective interconnection and optimized traffic exchange thus lowering overall cost and increasing flexibility. The ability to directly interconnect with a wide variety of companies is a key differentiator for us in the market. We are rolling out innovative exchanges to accelerate commercial growth in our sites and accelerate this network effect. Expand vertical go-to-market plan. We plan to continue to focus our go to market efforts on customer segments and business applications that value the Equinix value proposition of reliability, global reach and ecosystem collaboration opportunities. Today we have identified these segments as cloud and IT services, content and digital media, financial services, enterprises and network service providers. As digital business evolves, we will continue to identify and focus our go-to-market efforts on industry segments that need our value proposition. Accelerate global reach and scale. We continue to evaluate expansion opportunities in select markets based on customer demand. We expect to open eight new IBX data centers, or IBX data center expansions, in eight markets in 2011. In April 2010, we successfully completed our acquisition of Switch and Data Facilities Company, Inc. (“Switch and Data”). This extended our presence into 16 new markets in the U.S. and Canada. Our strategy is to continue to grow in select existing markets and possibly expand to additional markets where demand and financial return potential warrant. We recently announced our intention to extend Platform Equinix to South America by investing with Riverwood Capital to acquire a controlling interest in ALOG Data 7 Centers of Brazil S.A. We expect to execute this expansion strategy in a cost-effective and disciplined manner through a combination of acquiring existing data centers through lease or purchase, acquiring or investing in local data center operators and building new IBX data centers based on key criteria, such as demand and potential financial return, in each market. Our Customers Our customers include carriers and other bandwidth providers, cloud and IT services providers, content providers, financial companies and global enterprises. We offer each customer a choice of business partners and solutions based on their colocation, interconnection and managed IT service needs. As of December 31, 2010, we had 3,916 customers worldwide. Typical customers in our five key customer categories include the following: Cloud and IT Services Content Providers Enterprise Financial Companies Network Services Amazon.com Carpathia Microsoft Citrix IBM Salesforce.com Voxel.net eBay DIRECTV Facebook Google Booz Allen Hamilton Barnes & Noble Bechtel Deloitte & Touche Hulu SONY Yahoo! GAP The McGraw-Hill Companies United Stationers Inc ACTIV Financial Bloomberg Box. net CBOE DirectEdge JP Morgan Chase AT&T BT Comcast Level 3 Communications NTT Qwest Quantlab Financial Verizon Business Customers typically sign renewable contracts of one or more years in length. No single customer accounted for 10% or more of our revenues for the years ended December 31, 2010, 2009 or 2008. Our Services Equinix provides a choice of data center services primarily comprised of colocation, interconnection and managed IT infrastructure services. Colocation Services Our IBX data centers provide our customers with secure, reliable and fault-tolerant environments that are necessary for optimum Internet commerce interconnection. Many of our IBX data centers include multiple layers of physical security, scalable cabinet space availability, on-site trained staff 24 hours per day, 365 days a year, dedicated areas for customer care and equipment staging, redundant AC/DC power systems and multiple other redundant and fault-tolerant infrastructure systems. Some specifications or services provided may differ based on original facility design or market. Within our IBX data centers, customers can place their equipment and interconnect with a choice of networks or other business partners. We also provide customized solutions for customers looking to package our IBX services as part of their complex solutions. Our colocation products and services include: Cabinets. Our customers have several choices for colocating their networking, server and storage equipment. They can place the equipment in one of our shared or private cages or customize their space. In Europe, customers can purchase their own private “suite” which is walled off from the rest of the data center. As customers’ colocation requirements increase, they can expand within their original cage (or suite) or upgrade into a cage that meets their expanded requirements. Customers buy the hardware they place in our IBX data centers directly from their chosen vendors. Cabinets (or suites) are priced with an initial installation fee and an ongoing recurring monthly charge. 8 Power. Power is an element of increasing importance in customers’ colocation decisions. We offer both AC and DC power circuits at various amperages and phases customized to a customer’s individual power requirements. We also offer metered power in certain markets. Power is priced with an initial installation fee and an ongoing recurring monthly charge. IBXflex. IBXflex allows customers to deploy mission-critical operations personnel and equipment on-site at our IBX data centers. Because of the close proximity to their infrastructure within our IBX data centers, IBXflex customers can offer a faster response and quicker troubleshooting solution than those available in traditional colocation facilities. This space can also be used as a secure disaster recovery point for customers’ business and operations personnel. This service is priced with an initial installation fee and an ongoing recurring monthly charge. Interconnection Services Our interconnection services enable scalable, reliable and cost-effective interconnection and traffic exchange between Equinix customers. These interconnection services are either on a one-to-one basis with direct cross connects or one-to-many through one of our Equinix Exchange services. In the peering community, we provide an important industry leadership role by acting as the relationship broker between parties who would like to interconnect within our IBX data centers. Our staff holds significant positions in many leading industry groups, such as the North American Network Operators’ Group, or NANOG, and the Internet Engineering Task Force, or IETF. Members of our staff have published industry-recognized white papers and strategy documents in the areas of peering and interconnection, many of which are used by other institutions worldwide in furthering the education and promotion of this important set of services. We expect to continue to develop additional services in the area of traffic exchange that will allow our customers to leverage the critical mass of networks now available in our IBX data centers. Our current exchange services are comprised of the following: Physical Cross-Connect/Direct Interconnections. Customers needing to directly and privately connect to another IBX data center customer can do so through single or multi-mode fiber. These cross connections are the physical link between customers and can be implemented within 24 hours of request. Cross-connect services are priced with an initial installation fee and an ongoing monthly recurring charge. Equinix Internet Exchange. Customers may choose to connect to and peer through our Equinix Internet Exchange via a central switching fabric rather than purchase a direct physical cross connection. With a connection to this switch, a customer can aggregate multiple interconnects over one physical connection with up to multiple, linked 10 gigabit ports of capacity instead of purchasing individual physical cross connects. The service is priced per IBX data center with an initial installation fee and an ongoing monthly recurring charge. Individual IBX data center prices increase as the number of participants on the exchange service grows. Equinix IBXLink. Customers who are located in one IBX data center may need to interconnect with networks or other customers located in an adjacent or nearby IBX data center in the same metro area. IBXLink allows customers to seamlessly interconnect between IBX data centers at capacities up to an OC-192, or 10 gigabits per second level. IBXLink services are priced with an initial installation fee and an ongoing monthly recurring charge dependent on the capacity the customer purchases. Internet Connectivity Services. Customers who are installing equipment in our IBX data centers generally require IP connectivity or bandwidth services. Although many large customers prefer to contract directly with carriers, we offer customers the ability to contract for these services through us from any of the major bandwidth providers in that data center. This service, which is provided in our Asia-Pacific region, is targeted to customers who require a single bill and a single point of support for their entire services contract through Equinix for their bandwidth needs. Internet connectivity services are priced with an initial installation fee and an ongoing monthly recurring charge based on the amount of bandwidth committed. 9 Carrier Ethernet Exchange Services. We have launched a new Carrier Ethernet Exchange service similar to the Equinix Exchange in 10 initial markets where customers can connect via a central switching fabric to interconnect between multiple Carrier Ethernet Providers rather than creating individual Network to Network interfaces (NNIs) between individual carriers. The service builds on the benefits of the Internet community and extends the ability to interconnect the high growth Ethernet industry. The service is priced per IBX data center with an initial fee and a monthly recurring charge. Managed IT Infrastructure Services With the continued growth in Internet traffic, networks, service providers, enterprises and content providers are challenged to deliver fast and reliable service, while lowering costs. With more than 625 Internet Service Providers (ISPs) and carriers located in our IBX data centers, we leverage the value of network choice with our set of multi-network management and other outsourced IT services, including: Professional Services. Our IBX data centers are staffed with Internet and telecommunications specialists who are on-site and/or available 24 hours a day, 365 days a year. These professionals are trained to perform installations of customer equipment and cabling. Professional services are custom-priced depending on customer requirements. Smart Hands Services. Our customers can take advantage of our professional “Smart Hands” service, which gives customers access to our IBX data center staff for a variety of tasks, when their own staff is not on site. These tasks may include equipment rebooting and power cycling, card swapping and performing emergency equipment replacement. Services are available on-demand or by customer contract and are priced on an hourly basis. Equinix Direct. Equinix Direct is a managed multi-homing service that allows customers to easily provision and manage multiple network connections over a single interface. Customers can choose branded networks on a monthly basis with no minimums or long-term commitments. This service is priced with an initial installation fee and ongoing monthly recurring charges, depending on the bandwidth used by the customer. Sales and Marketing Sales. We use a direct sales force and channel marketing program to market our services to global enterprises, content providers, financial companies and network service providers. We organize our sales force by customer type as well as by establishing a sales presence in diverse geographic regions, which enables efficient servicing of the customer base from a network of regional offices. In addition to our worldwide headquarters located in Silicon Valley, we have established an Asia-Pacific regional headquarters in Hong Kong, and a European regional headquarters in London. Our North America sales offices are located in Boston, Chicago, Los Angeles, New York, Reston, Virginia and Silicon Valley. Our Asia-Pacific sales offices are located in Hong Kong, Singapore, Sydney and Tokyo. Our European sales offices are located in Amsterdam, Dusseldorf, Frankfurt, Geneva, London, Munich, Paris and Zurich. Our sales team works closely with each customer to foster the natural network effect of our IBX model, resulting in access to a wider potential customer base via our existing customers. As a result of the IBX interconnection model, IBX data center participants often encourage their customers, suppliers and business partners to also locate in our IBX data centers. These customers, suppliers and business partners, in turn, encourage their business partners to locate in our IBX data centers resulting in additional customer growth. This network effect significantly reduces our new customer acquisition costs. In addition, large network providers or managed service providers may refer customers to Equinix as a part of their total customer solution. Equinix also focuses vertical sales specialists selling to support specific industry requirements for network and content providers, financial services, cloud computing and systems integrators and enterprise customer segments. 10 Marketing. To support our sales effort and to actively promote our brand in the U.S., Asia-Pacific and Europe, we conduct comprehensive marketing programs. Our marketing strategies include active public relations and ongoing customer communications programs. Our marketing efforts are focused on major business and trade publications, online media outlets, industry events and sponsored activities. Our staff holds leadership positions in key networking organizations, and we participate in a variety of Internet, Carrier Ethernet, computer and financial industry conferences, placing our officers and employees in keynote speaking engagements at these conferences. We also regularly measure customer satisfaction levels and host key customer forums to ensure customer needs are understood and incorporated in product and service planning efforts. From a brand perspective, we build recognition through sponsoring or leading industry technical forums, participating in Internet industry standard-setting bodies and through advertising and online campaigns. We continue to develop and host industry educational forums focused on peering technologies and practices for ISPs and content providers. Our Competition While a large number of enterprises own their own data centers, many others outsource some or all of their requirements to multi-tenant Internet data center facilities, such as those operated by Equinix. With the current challenging economic environment, we believe that the outsourcing trend is likely to not only continue but also to grow in the coming years. It is estimated that Equinix is one of over 650 companies that provide Internet data center services around the world, ranging in size from firms with a single data center in a single market to firms in over 20 markets. Equinix competes with these firms, which vary in terms of their data center offerings, including: Colocation Providers Colocation data centers are a type of Internet data center that can also be referred to as ‘retail’ data center space. Typically, colocation data center space is sold on the basis of individual racks/cabinets or cages ranging from 500 to 5,000 square feet in size. Typical customers of colocation providers include: • Large enterprises with significant IT expertise and requirements • • Small and medium businesses looking to outsource data center requirements Internet application providers • Major Internet content, entertainment and social networking providers • Shared, dedicated and managed hosting providers • Telecommunications carriers • Content delivery networks Full facility maintenance and systems, including fire suppression, security, power backup and HVAC, are routinely included in managed colocation offerings. A variety of additional services is typically available in colocation facilities, including remote hands technician services and network monitoring services. In addition to Equinix, providers that offer colocation services both globally and locally include firms such as Savvis, Inc., Verizon Business, AT&T, Level 3 Communications, Qwest, NTT and COLT. Carrier-Neutral Colocation Providers In addition to data center space and power, colocation providers also offer interconnection services. Certain of these providers, known as network or carrier-neutral colocation providers, can offer customers the choice of hundreds of network service providers, or ISPs, to choose from. Typically, customers use interconnection services to buy Internet connectivity, connect voice over IP (VoIP) telephone networks, perform financial 11 exchange and settlement functions or perform business-to-business e-commerce. Carrier-neutral data centers are often located in key network hubs around the world like New York; Ashburn, Virginia; London; Amsterdam; Singapore, and Hong Kong. Two types of data center facilities offering carrier-neutral colocation are used for many network-to-network interconnections: • A Meet Me Room (MMR) is typically a smaller space, generally 5,000 square feet or less, located in a major carrier hotel and often found in a wholesale data center facility. • A carrier-neutral data center is generally larger than a MMR and may be a stand-alone building separate from existing carrier hotels. In addition to Equinix, other providers that we believe could be defined as offering carrier-neutral colocation include CoreSite, Interxion, Telecity Group, Telx, Global Switch, TELEHOUSE and Terremark. Wholesale Data Center Providers Wholesale data center providers lease data center space that is typically sold in cells or pods (i.e., individual white-space rooms) ranging in size from 10,000 to 20,000 square feet, or larger. Wholesale data center providers sell to both enterprises and to colocation providers. These data centers primarily provide space and power without additional services like technicians, remote hands services or network monitoring (although other tenants might offer such services). Wholesale data center providers are typically classified as REITs (real estate investment trusts). Their offerings are conceptually similar to a landlord who provides empty space and basic maintenance services to warehouse tenants. Sample wholesale data center providers include Digital Realty Trust and Dupont Fabros Technology. Managed Hosters Managed hosting services are provided by several firms that also provide data center colocation services. Typically, managed hosting providers can manage server hardware that is owned by either the hosting provider or the customer. They can also provide a combination of comprehensive systems administration, database administration and sometimes application management services. Frequently, this results in managed hosting providers “running” the customer’s servers, although such administration is frequently shared. The provider may manage such functions as operating systems, databases, security and patch management, while the customer will maintain management of the applications riding on top of those systems. The full list of potential services that can be offered as part of managed hosting is substantial and includes services such as remote management, custom applications, helpdesk, messaging, databases, disaster recovery, managed storage, managed virtualization, managed security, managed networks and systems monitoring. Managed hosting services are typically used for: • Application hosting by organizations of any size, including large enterprises • Hosted or managed messaging, including Microsoft Exchange and other complex messaging applications • Complex or highly scalable web hosting or e-commerce web sites • Managed storage solutions (including large drive arrays or backup robots) • Server disaster recovery and business continuity, including clustering and global server load balancing • Database servers, applications and services Examples of managed hosters include Rackspace, Verizon Business, AT&T, Savvis, Inc., SunGard and NaviSite. 12 Unlike other providers whose core businesses are bandwidth or managed services, we focus on neutral interconnection hubs for cloud and IT service providers, content providers, financial companies, enterprises and network service providers. As a result, we are free of the limited choices found commonly at other hosting/ colocation companies. We compete based on the quality of our IBX data centers, our ability to provide a one-stop global solution in our North American, European and Asia-Pacific locations, the performance and diversity of our network-neutral strategy, and the economic benefits of the aggregation of top network and business ecosystems under one roof. We expect to continue to benefit from several industry trends including a supply/ demand imbalance in the colocation market, the need for contracting with multiple networks due to the uncertainty in the telecommunications market, customers’ increasing power requirements, enterprise customers’ growth in outsourcing, the continued growth of broadband and significant growth in Ethernet as a network alternative, and mobile applications. Our Business Segment Financial Information We currently operate in three reportable segments, comprised of our North America, Europe and Asia- Pacific geographic regions. Information attributable to each of our reportable segments is set forth in Note 15 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Employees As of December 31, 2010, we had 1,921 employees. We had 1,156 employees based in the North America, 482 employees based in Europe and 283 employees based in Asia-Pacific. Of those employees, 837 were in engineering and operations, 320 were in sales and marketing and 764 were in management, finance and administration. Available Information We were incorporated in Delaware in June 1998. We are required to file reports under the Securities Exchange Act of 1934, as amended, with the Securities and Exchange Commission. You may read and copy our materials on file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information regarding the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements and other information. You may also obtain copies of our annual report on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K, and any amendments to such reports, free of charge by visiting the Investor Relations page on our website, www.equinix.com. These reports are available as soon as reasonably practical after we file them with the SEC. Information contained on our website is not part of this Annual Report on Form 10-K. ITEM 1A. RISK FACTORS In addition to the other information contained in this report, the following risk factors should be considered carefully in evaluating our business and us: Acquisitions present many risks, and we may not realize the financial or strategic goals that were contemplated at the time of any transaction. Over the last several years, we have completed several acquisitions, including that of IXEurope plc in 2007, Virtu Secure Webservices B.V. in 2008, Upminster GmbH in 2009 and Switch and Data in 2010. We may make additional acquisitions in the future, which may include acquisitions of businesses, products, services or technologies that we believe to be complementary, acquisitions of new IBX data centers or real estate for development of new IBX data centers or through investments in local data center operators. For example, we 13 recently announced our intention to acquire a controlling interest in ALOG Data Centers of Brazil S.A. We may pay for future acquisitions by using our existing cash resources (which may limit other potential uses of our cash), incurring additional debt (which may increase our interest expense, leverage and debt service requirements) and/or issuing shares (which may dilute our existing stockholders and have a negative effect on our earnings per share). Acquisitions expose us to several potential risks, including: • • • • • • • • • • • • • • the possible disruption of our ongoing business and diversion of management’s attention by acquisition, transition and integration activities; our potential inability to successfully pursue or realize some or all of the anticipated revenue opportunities associated with an acquisition or investment; the possibility that we may not be able to successfully integrate acquired businesses, or businesses in which we invest, or achieve anticipated operating efficiencies or cost savings; the possibility that announced acquisitions may not be completed, due to failure to satisfy the conditions to closing or for other reasons; the dilution of our existing stockholders as a result of our issuing stock in transactions, such as our acquisition of Switch and Data, where 80% of the consideration payable to Switch and Data’s stockholders consisted of shares of our common stock; the possibility of customer dissatisfaction if we are unable to achieve levels of quality and stability on par with past practices; the possibility that our customers may not accept either the existing equipment infrastructure or the “look-and-feel” of a new or different IBX data center; the possibility that additional capital expenditures may be required or that transaction expenses associated with acquisitions may be higher than anticipated; the possibility that required financing to fund the requirements of an acquisition may not be available on acceptable terms or at all; the possibility that we may be unable to obtain required approvals from governmental authorities under antitrust and competition laws on a timely basis or at all, which could, among other things, delay or prevent us from completing an acquisition, limit our ability to realize the expected financial or strategic benefits of an acquisition or have other adverse effects on our current business and operations; the possible loss or reduction in value of acquired businesses; the possibility that carriers may find it cost-prohibitive or impractical to bring fiber and networks into a new IBX data center; the possibility of litigation or other claims in connection with or as a result of an acquisition, including claims from terminated employees, customers, former stockholders or other third parties; and the possibility of pre-existing undisclosed liabilities, including but not limited to lease or landlord related liability, environmental or asbestos liability, for which insurance coverage may be insufficient or unavailable. The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition or cash flows. We cannot assure you that the price for any future acquisitions of IBX data centers will be similar to prior IBX data center acquisitions. In fact, we expect costs required to build or render new IBX data centers operational to increase in the future. If our revenue does not keep pace with these potential acquisition and expansion costs, we may not be able to maintain our current or expected margins as we absorb these additional expenses. There is no assurance we would successfully overcome these risks or any other problems encountered with these acquisitions. 14 Our substantial debt could adversely affect our cash flows and limit our flexibility to raise additional capital. We have a significant amount of debt and expect to incur additional debt to support our growth. As of December 31, 2010, our total indebtedness was approximately $2.0 billion, our stockholders’ equity was $1.9 billion and our cash and investments totaled $592.8 million. Our substantial amount of debt could have important consequences. For example, it could: • require us to dedicate a substantial portion of our cash flow from operations to make interest and principal payments on our debt, reducing the availability of our cash flow to fund future capital expenditures, working capital, execution of our expansion strategy and other general corporate requirements; • make it more difficult for us to satisfy our obligations under our various debt instruments; • • • increase our vulnerability to general adverse economic and industry conditions and adverse changes in governmental regulations; limit our flexibility in planning for, or reacting to, changes in our business and industry, which may place us at a competitive disadvantage compared with our competitors; limit our ability to borrow additional funds, even when necessary to maintain adequate liquidity, which would also limit our ability to further expand our business; and • make us more vulnerable to increases in interest rates because of the variable interest rates on some of our borrowings to the extent we have not entirely hedged such variable rate debt. The occurrence of any of the foregoing factors could have a material adverse effect on our business, results of operations and financial condition. In addition, the performance of our stock price may trigger events that would require the write-off of a significant portion of our debt issuance costs related to our convertible debt, which may have a material adverse effect on our results of operations. We may also need to refinance a portion of our outstanding debt as it matures, such as our $250.0 million 2.50% convertible subordinated notes due in 2012. There is a risk that we may not be able to refinance existing debt or that the terms of any refinancing may not be as favorable as the terms of our existing debt. Furthermore, if prevailing interest rates or other factors at the time of refinancing result in higher interest rates upon refinancing, then the interest expense relating to that refinanced indebtedness would increase. These risks could materially adversely affect our financial condition, cash flows and results of operations. The uncertain economic environment may continue to have an impact on our business and financial condition. The uncertain economic environment could have an adverse effect on our liquidity. Customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience strong collections, if the current market conditions were to worsen, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us. We may also be required to further increase our allowance for doubtful accounts and our results would be negatively impacted. Our sales cycle could also be further lengthened if customers slow spending, or delay decision-making, on our products and services, which could adversely affect our revenue growth. Finally, we could also experience pricing pressure as a result of economic conditions if our competitors lower prices and attempt to lure away our customers with lower cost solutions. The uncertain economic environment could also have an impact on our foreign exchange forward contracts if our counterparties’ credit deteriorates further or they are otherwise unable to perform their obligations. 15 Finally, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to do so which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future. The market price of our stock may continue to be highly volatile, and the value of an investment in our common stock may decline. Since January 1, 2010, the closing sale price of our common stock on the NASDAQ Global Select Market has ranged from $70.34 to $109.56 per share. The market price of the shares of our common stock has been and may continue to be highly volatile. General economic and market conditions, and market conditions for telecommunications stocks in general, may affect the market price of our common stock. Announcements by others or us may also have a significant impact on the market price of our common stock. These announcements may relate to: • • • • • • • • • • our operating results or forecasts; new issuances of equity, debt or convertible debt by us; developments in our relationships with corporate customers; announcements by our customers or competitors; changes in regulatory policy or interpretation; governmental investigations; changes in the ratings of our debt or stock by rating agencies or securities analysts; our purchase or development of real estate and/or additional IBX data centers; acquisitions by us of complementary businesses; or the operational performance of our IBX data centers. The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging telecommunications companies, and which have often been unrelated to their operating performance. These broad market fluctuations may adversely affect the market price of our common stock. Furthermore, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and/or damages, and divert management’s attention from other business concerns, which could seriously harm our business. If we are not able to generate sufficient operating cash flows or obtain external financing, our ability to fund incremental expansion plans may be limited. Our capital expenditures, together with ongoing operating expenses and obligations to service our debt, will be a substantial drain on our cash flow and may decrease our cash balances. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to obtain additional debt and/or equity financing or to generate sufficient cash from operations may require us to prioritize projects or curtail capital expenditures which could adversely affect our results of operations. Fluctuations in foreign currency exchange rates in the markets in which we operate internationally could harm our results of operations. We may experience gains and losses resulting from fluctuations in foreign currency exchange rates. To date, the majority of our revenues and costs are denominated in U.S. dollars; however, the majority of revenues and 16 costs in our international operations are denominated in foreign currencies. Where our prices are denominated in U.S. dollars, our sales could be adversely affected by declines in foreign currencies relative to the U.S. dollar, thereby making our products and services more expensive in local currencies. We are also exposed to risks resulting from fluctuations in foreign currency exchange rates in connection with our international expansions. To the extent we are paying contractors in foreign currencies, our expansions could cost more than anticipated as a result of declines in the U.S dollar relative to foreign currencies. In addition, fluctuating foreign currency exchange rates have a direct impact on how our international results of operations translate into U.S. dollars. Although we have in the past, and may decide in the future, to undertake foreign exchange hedging transactions to reduce foreign currency transaction exposure, we do not currently intend to eliminate all foreign currency transaction exposure. For example, while we hedge certain of our foreign currency assets and liabilities on our consolidated balance sheet, we do not hedge revenue. Therefore, any weakness of the U.S. dollar may have a positive impact on our consolidated results of operations because the currencies in the foreign countries in which we operate may translate into more U.S. dollars. However, if the U.S. dollar strengthens relative to the currencies of the foreign countries in which we operate our consolidated financial position and results of operations may be negatively impacted as amounts in foreign currencies will generally translate into fewer U.S. dollars. For additional information on foreign currency risk, refer to our discussion of foreign currency risk in “Quantitative and Qualitative Disclosures About Market Risk” included in Part II, Item 7A of this Annual Report. We are continuing to invest in our expansion efforts but may not have sufficient customer demand in the future to realize expected returns on these investments. We are considering the acquisition or lease of additional properties and the construction of new IBX data centers beyond those expansion projects already announced. We will be required to commit substantial operational and financial resources to these IBX data centers, generally 12 to 18 months in advance of securing customer contracts, and we may not have sufficient customer demand in those markets to support these centers once they are built. In addition, unanticipated technological changes could affect customer requirements for data centers and we may not have built such requirements into our new IBX data centers. Either of these contingencies, if they were to occur, could make it difficult for us to realize expected or reasonable returns on these investments. Our products and services have a long sales cycle that may harm our revenues and operating results. A customer’s decision to license cabinet space in one of our IBX data centers and to purchase additional services typically involves a significant commitment of resources. In addition, some customers will be reluctant to commit to locating in our IBX data centers until they are confident that the IBX data center has adequate carrier connections. As a result, we have a long sales cycle. Furthermore, we may expend significant time and resources in pursuing a particular sale or customer that does not result in revenue. We are also planning significant hiring in our sales force for 2011. It will take time for these new hires to become fully productive. The current economic downturn may further impact this long sales cycle by making it extremely difficult for customers to accurately forecast and plan future business activities. This could cause customers to slow spending, or delay decision-making, on our products and services, which would delay and lengthen our sales cycle. Delays due to the length of our sales cycle may materially and adversely affect our revenues and operating results, which could harm our ability to meet our forecasts for a given quarter and cause volatility in our stock price. We have incurred substantial losses in the past and may incur additional losses in the future. As of December 31, 2010, our accumulated deficit was $349.1 million. Although we have generated net income for each fiscal year since 2008, which was our first full year of net income since our inception, we are 17 also currently investing heavily in our future growth through the build-out of multiple additional IBX data centers and IBX data center expansions as well as acquisitions of complementary businesses. As a result, we will incur higher depreciation and other operating expenses, as well as acquisition costs and interest expense, that may negatively impact our ability to sustain profitability in future periods unless and until these new IBX data centers generate enough revenue to exceed their operating costs and cover our additional overhead needed to scale our business for this anticipated growth. The current global financial crisis may also impact our ability to sustain profitability if we cannot generate sufficient revenue to offset the increased costs of our recently-opened IBX data centers or IBX data centers currently under construction. In addition, costs associated with the acquisition and integration of any acquired companies, as well as the additional interest expense associated with debt financing we have undertaken to fund our growth initiatives, may also negatively impact our ability to sustain profitability. Finally, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis. Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results. Our business depends on providing customers with highly reliable service. We must protect our customers’ IBX infrastructure and their equipment located in our IBX data centers. While we own certain of our IBX data centers, others are leased by us, and we rely on the landlord for basic maintenance of the property. If such landlord has not maintained a leased property sufficiently, we may be forced into an early exit from the center which could be disruptive to our business. Furthermore, we continue to acquire IBX data centers not built by us. If we discover that these IBX data centers and their infrastructure assets are not in the condition we expected when they were acquired, we may be required to incur substantial additional costs to repair or upgrade the centers. The services we provide in each of our IBX data centers are subject to failure resulting from numerous factors, including: • • • • • human error; equipment failure; physical, electronic and cybersecurity breaches; fire, earthquake, hurricane, flood, tornado and other natural disasters; extreme temperatures; • water damage; • • • • • fiber cuts; power loss; terrorist acts; sabotage and vandalism; and failure of business partners who provide our resale products. Problems at one or more of our IBX data centers, whether or not within our control, could result in service interruptions or significant equipment damage. We have service level commitment obligations to certain of our customers, including our significant customers. As a result, service interruptions or significant equipment damage in our IBX data centers could result in difficulty maintaining service level commitments to these customers and potential claims related to such failures. Because our IBX data centers are critical to many of our customers’ businesses, service interruptions or significant equipment damage in our IBX data centers could also result in lost profits or other indirect or consequential damages to our customers. We cannot guarantee that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against us as the result of a problem at one of our IBX data centers. 18 We may incur significant liabilities to our customers in connection with a loss of power or our failure to meet other service level commitment obligations, or if we are held liable for a substantial damage award. In addition, any loss of service, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results. We may also incur significant liability in the event of an earthquake, particularly in California where insurance coverage for earthquakes can be extremely expensive. While we purchase minimal levels of earthquake coverage for certain of our IBX data centers in California, at other California IBX data centers we have elected to self-insure. In the event of a large earthquake in California, we may find our insurance coverage to be inadequate to cover our damages, and our business, financial condition and results of operations could be materially and adversely impacted. Furthermore, we are dependent upon Internet service providers, telecommunications carriers and other website operators in the North America region, Asia-Pacific region, Europe and elsewhere, some of which have experienced significant system failures and electrical outages in the past. Users of our services may in the future experience difficulties due to system failures unrelated to our systems and services. If for any reason, these providers fail to provide the required services, our business, financial condition and results of operations could be materially and adversely impacted. Our construction of additional new IBX data centers, or IBX data center expansions, could involve significant risks to our business. In order to sustain our growth in certain of our existing and new markets, we must either expand an existing data center or acquire suitable land with or without structures to build new IBX data centers from the ground up. Expansions or new builds are currently underway, or being contemplated, in many of our markets. A new build involves substantial planning and lead-time, much longer time to completion than an IBX retrofit of an existing data center or a data center expansion, and significantly higher costs of construction, equipment and materials, which could have a negative impact on our returns. Any construction requires us to carefully select and rely on the experience of one or more general contractors, designers and associated subcontractors during the design and construction process. Should a general contractor, designer or significant subcontractor experience financial or other problems during the design or construction process, we could experience significant delays, increased costs to complete the project and other negative impacts to our expected returns. Site selection is also a critical factor in our expansion plans, and there may not be suitable properties available in our markets with the necessary combination of high power capacity and fiber connectivity. While we may prefer to locate new IBX data centers adjacent to our existing locations, we may be limited by the inventory and location of suitable properties, as well as by the need for adequate power and fiber to the site. In the event we decide to build new IBX data centers separate from our existing IBX data centers, we may provide services to interconnect these two centers. Should these services not provide the necessary reliability to sustain service, this could result in lower interconnection revenue and lower margins and could have a negative impact on customer retention over time. Environmental regulations may impose upon us new or unexpected costs. We are subject to various federal, state, local and foreign environmental and health and safety laws and regulations, including those relating to the generation, storage, handling and disposal of hazardous substances and wastes. Certain of these laws and regulations also impose joint and several liability, without regard to fault, for investigation and cleanup costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment. Our operations involve the use of hazardous substances and materials such as petroleum fuel for emergency generators, as well as batteries, cleaning solutions and other materials. In addition, we lease, own or operate real property at which hazardous substances and regulated materials have been used in the past. At some of our locations, hazardous substances or 19 regulated materials are known to be present in soil or groundwater and there may be additional unknown hazardous substances or regulated materials present at sites we own, operate or lease. At some of our locations, there are land use restrictions in place relating to earlier environmental cleanups that do not materially limit our use of the sites. To the extent any hazardous substances or any other substance or material must be cleaned up or removed from our property, we may be responsible under applicable laws, regulations or leases for the removal or cleanup of such substances or materials, the cost of which could be substantial. In addition, we are subject to environmental, health and safety laws regulating air emissions, storm water management and other issues arising in our business. While these obligations do not normally impose material costs upon our operations, unexpected events, equipment malfunctions and human error, among other factors, can lead to violations of environmental laws, regulations or permits. Furthermore, environmental laws and regulations change frequently and may require additional investment to maintain compliance. Noncompliance with existing, or adoption of more stringent, environmental or health and safety laws and regulations or the discovery of previously unknown contamination could require us to incur costs or become the basis of new or increased liabilities that could be material. Fossil fuel combustion creates greenhouse gas emissions that are linked to global climate change. Regulations to limit greenhouse gas emissions are in force in the European Union in an effort to prevent or reduce climate change. In the United States, federal legislative proposals have been considered that would, if adopted, implement some form of regulation or taxation to reduce or mitigate greenhouse gas (“GHG”) emissions. In addition, the U.S. Environmental Protection Agency (“EPA”) is taking steps towards using its existing authority under the Clean Air Act to regulate GHG emissions. On June 3, 2010, EPA published a final rule, known as the Tailoring Rule, setting forth the permitting program for regulating GHG emissions from major stationary sources. These permitting requirements will include, but are not limited to, meeting the best available control technologies for GHG emissions, and monitoring, reporting and recordkeeping for GHG emissions. The first steps of the program became effective January 2, 2011, and apply to large sources of GHGs such as, for example, fossil-fueled electricity generating facilities, that are already subject to Clean Air Act major source permits for their emission of non-greenhouse gas air pollutants (such as sulfur dioxide or particulate matter). The second step of the permitting program is effective July 1, 2011, and applies to the construction a new facility that will emit 100,000 tons per year or more of carbon dioxide equivalent (“CO2e”, a unit of measurement for GHGs) or to the modification of an existing facility that results in an increase of GHG emissions by 75,000 tons per year of CO2e. There is a small-source exception to the Tailoring Rule that we believe applies to our facilities. Under the exception, no source with emissions below 50,000 tons per year of CO2e or any modification resulting in an increase of less than 50,000 tons per year of CO2e will be subject to PSD or Title V permitting before at least April 30, 2016. EPA also announced plans in the final rule to develop permitting requirements for smaller sources of GHGs after the expiration of the small-source exception, which could potentially affect our facilities. We are in the process of confirming that the small-source exception applies to our facilities and will continue to monitor the developments of this regulatory program to evaluate its impact on our facilities and business. Several states within the United States have adopted laws intended to limit fossil fuel consumption and/or encourage renewable energy development for the same purpose. For example, California enacted AB-32, the Global Warming Solutions Act of 2006, prescribing a statewide cap on global warming pollution with a goal of reaching 1990 GHG emission levels by 2020 and 80% below 1990 levels by 2050 and establishing a mandatory emissions reporting program. On December 16, 2010, the California Air Resources Board adopted the initial elements of a cap-and-trade program to implement AB-32, which will establish a minimum price for greenhouse gas emission allowances required to generate electricity in California or import electricity into California. This cap-and-trade regulation is intended to take effect January 1, 2012, and will increase our electricity costs by an amount that cannot yet be determined, but could exceed 5% of our costs of electricity at our California locations. Federal, regional, state and international regulatory programs are still developing. In their final form, they may include a tax on carbon, a carbon “cap-and-trade” market, and/or other restrictions on carbon and GHG emissions. The area of GHG limitations and regulation is rapidly changing and will continue to change as 20 additional legislation is considered and adopted, and regulations are finalized that implement existing law. For example, the United Kingdom recently adopted the mandatory Carbon Reduction Commitment Energy Efficiency Scheme (“CRC”), which requires certain public and private sector organizations that are consumers of large amounts of electricity to register with the program, participate in energy-saving activities and reduce their GHG emissions. The CRC became effective April 1, 2010, and qualifying organizations were required to register by September 30, 2010, which we have done. Recently the new United Kingdom Government has postponed the start of the CRC for at least one year to evaluate certain aspects of the CRC, and we are monitoring developments and continuing to evaluate the extent of our obligations and the implications for our business in the United Kingdom. We do not anticipate that climate change-related laws and regulations would directly limit the emissions of GHG by our operations. We could, however, be directly subject to taxes, fees or costs, or could indirectly be required to reimburse electricity providers for such costs that would represent the amount of GHG we emit. The expected controls on GHG emissions are likely to increase the costs of electricity or fossil fuels, and these cost increases could materially increase our costs of operation or limit the availability of electricity or emergency generator fuels. The physical impacts of climate change, including extreme weather conditions such as heat waves, could materially increase our costs of operation due to, for example, an increase in our energy use in order to maintain the temperature and internal environment of our data centers necessary for our operations. To the extent any environmental laws enacted or regulations passed by the United States, or any domestic or foreign jurisdiction we perform business in, impose new or unexpected costs, our business, results of operations or financial condition may be adversely affected. We may not be able to compete successfully against current and future competitors. Our IBX data centers and other products and services must be able to differentiate themselves from those of other providers of space and services for telecommunications companies, webhosting companies and other colocation providers. In addition to competing with neutral colocation providers, we must compete with traditional colocation providers, including telecom companies, carriers, Internet service providers and webhosting facilities. Similarly, with respect to our other products and services, including managed services, bandwidth services and security services, we must compete with more established providers of similar services. Most of these companies have longer operating histories and significantly greater financial, technical, marketing and other resources than us. Because of their greater financial resources, some of our competitors have the ability to adopt aggressive pricing policies, especially if they have been able to restructure their debt or other obligations. As a result, in the future, we may suffer from pricing pressure that would adversely affect our ability to generate revenues and adversely affect our operating results. In addition, these competitors could offer colocation on neutral terms, and may start doing so in the same metropolitan areas in which we have IBX data centers. Some of these competitors may also provide our target customers with additional benefits, including bundled communication services, and may do so in a manner that is more attractive to our potential customers than obtaining space in our IBX data centers. If these competitors were able to adopt aggressive pricing policies together with offering colocation space, our ability to generate revenues may be materially and adversely affected. We may also face competition from persons seeking to replicate our IBX data center concept by building new data centers or converting existing data centers that some of our competitors are in the process of divesting. We may continue to see increased competition for data center space and customers from large REITS who also operate in our market. We may experience competition from our landlords, some of which are REITS, in this regard. Rather than leasing available space in our buildings to large single tenants, they may decide to convert the space instead to smaller square foot units designed for multi-tenant colocation use. Landlords/REITS may enjoy a cost effective advantage in providing services similar to those provided by our IBX data centers, and in addition to the risk of losing customers to these parties, this could also reduce the amount of space available to us for expansion in the future. Competitors may operate more successfully or form alliances to acquire significant 21 market share. Furthermore, enterprises that have already invested substantial resources in outsourcing arrangements may be reluctant or slow to replace, limit or compete with their existing systems by becoming a customer. Customers may also decide it is cost-effective for them to build out their own data centers, which could have a negative impact on our results of operations. In addition, other companies may be able to attract the same potential customers that we are targeting. Once customers are located in competitors’ facilities, it may be extremely difficult to convince them to relocate to our IBX data centers. Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general lack of availability of electrical resources. Our IBX data centers are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages and limitations, especially internationally, on the availability of adequate power resources. Power outages, such as those that occurred in California during 2001, the Northeast in 2003, and from the tornados on the U.S. east coast in 2004, could harm our customers and our business. We attempt to limit exposure to system downtime by using backup generators and power supplies; however, we may not be able to limit our exposure entirely even with these protections in place, as was the case with the power outages we experienced in our Chicago and Washington, D.C. metro area IBX data centers in 2005, London metro area IBX data centers in 2007 and Paris metro area IBX data centers in 2009. In addition, global fluctuations in the price of power can increase the cost of energy, and although contractual price increase clauses exist in the majority of our customer agreements, we may not always choose to pass these increased costs on to our customers. In each of our markets, we rely on third parties to provide a sufficient amount of power for current and future customers. At the same time, power and cooling requirements are growing on a per unit basis. As a result, some customers are consuming an increasing amount of power per cabinet. We generally do not control the amount of electric power our customers draw from their installed circuits. This means that we could face power limitations in our centers. This could have a negative impact on the effective available capacity of a given center and limit our ability to grow our business, which could have a negative impact on our financial performance, operating results and cash flows. We may also have difficulty obtaining sufficient power capacity for potential expansion sites in new or existing markets. We may experience significant delays and substantial increased costs demanded by the utilities to provide the level of electrical service required by our current IBX data center designs. We are exposed to potential risks from errors in our financial reporting systems and controls, including the potential for material misstatements in our consolidated financial statements. Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to evaluate their internal controls over financial reporting. Although we received an unqualified opinion regarding the effectiveness of our internal control over financial reporting as of December 31, 2010, in the course of our ongoing evaluation we have identified certain areas where we would like to improve and we are in the process of evaluating and designing enhanced processes and controls to address such areas, none of which we believe constitutes a material change. However, we cannot be certain that our efforts will be effective or sufficient for us, or our independent registered public accounting firm, to issue unqualified reports in the future, especially as our business continues to grow and evolve and as we acquire other businesses. Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls. We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timely manner and have in the 22 past, and may in the future, discover deficiencies in existing systems and controls. In addition, internal reporting systems and controls are subject to human error. Any such deficiencies could result in material misstatements in our consolidated financial statements, which might involve restating previously issued financial statements. Additionally, as we expand, we will need to implement new systems to support our financial reporting systems and controls. We may not be able to implement these systems such that errors would be identified in a timely manner, which could result in material misstatements in our consolidated financial statements. If we cannot effectively manage our international operations, and successfully implement our international expansion plans, our revenues may not increase and our business and results of operations would be harmed. For the years ended December 31, 2010, 2009 and 2008, we recognized 38%, 39% and 37%, respectively, of our revenues outside the U.S. We currently operate outside of North America in Europe and in the Asia- Pacific region. We also recently announced our intention to expand into South America through an investment in ALOG Data Centers of Brazil S.A. To date, the network neutrality of our IBX data centers and the variety of networks available to our customers has often been a competitive advantage for us. In certain of our acquired IBX data centers in the Asia- Pacific region the limited number of carriers available reduces that advantage. As a result, we may need to adapt our key revenue-generating services and pricing to be competitive in those markets. In addition, we are currently undergoing expansions or evaluating expansion opportunities in Europe and in the Asia-Pacific region. Undertaking and managing expansions in foreign jurisdictions may present unanticipated challenges to us. Our international operations are generally subject to a number of additional risks, including: • • • • • • • • • • • • • the costs of customizing IBX data centers for foreign countries; protectionist laws and business practices favoring local competition; greater difficulty or delay in accounts receivable collection; difficulties in staffing and managing foreign operations, including negotiating with foreign labor unions or workers’ councils; difficulties in managing across cultures and in foreign languages; political and economic instability; fluctuations in currency exchange rates; difficulties in repatriating funds from certain countries; our ability to obtain, transfer, or maintain licenses required by governmental entities with respect to our business; unexpected changes in regulatory, tax and political environments; our ability to secure and maintain the necessary physical and telecommunications infrastructure; compliance with the Foreign Corrupt Practices Act; and compliance with evolving governmental regulation with which we have little experience. In addition, compliance with international and U.S. laws and regulations that apply to our international operations increases our cost of doing business in foreign jurisdictions. These laws and regulations include data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, export requirements, U.S. laws such as the Foreign Corrupt Practices Act, and local laws which also prohibit corrupt payments to governmental officials. Violations of these laws and regulations could result in fines, criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. 23 Any such violations could include prohibitions on our ability to offer our services in one or more countries, could delay or prevent potential acquisitions, and could also materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain employees, our business and our operating results. Our success depends, in part, on our ability to anticipate and address these risks and manage these difficulties. The increased use of high power density equipment may limit our ability to fully utilize our IBX data centers. Customers are increasing their use of high-density electrical power equipment, such as blade servers, in our IBX data centers which has significantly increased the demand for power on a per cabinet basis. Because many of our IBX data centers were built a number of years ago, the current demand for electrical power may exceed the designed electrical capacity in these centers. As electrical power, not space, is a limiting factor in many of our IBX data centers, our ability to fully utilize those IBX data centers may be limited. The availability of sufficient power may also pose a risk to the successful operation of our new IBX data centers. The ability to increase the power capacity of an IBX data center, should we decide to, is dependent on several factors including, but not limited to, the local utility’s ability to provide additional power; the length of time required to provide such power; and/or whether it is feasible to upgrade the electrical infrastructure of an IBX data center to deliver additional power to customers. Although we are currently designing and building to a much higher power specification, there is a risk that demand will continue to increase and our IBX data centers could become obsolete sooner than expected. We expect our operating results to fluctuate. We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuations in our operating results may cause the market price of our common stock to be volatile. We may experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including, but not limited to: • • • • • • • • • • • fluctuations of foreign currencies in the markets in which we operate; the timing and magnitude of depreciation and interest expense or other expenses related to the acquisition, purchase or construction of additional IBX data centers or the upgrade of existing IBX data centers; demand for space, power and services at our IBX data centers; changes in general economic conditions, such as the current economic downturn, and specific market conditions in the telecommunications and Internet industries, both of which may have an impact on our customer base; charges to earnings resulting from past acquisitions due to, among other things, impairment of goodwill or intangible assets, reduction in the useful lives of intangible assets acquired, identification of additional assumed contingent liabilities or revised estimates to restructure an acquired company’s operations; the duration of the sales cycle for our services; restructuring charges or reversals of existing restructuring charges, which may be necessary due to revised sublease assumptions, changes in strategy or otherwise; acquisitions or dispositions we may make; the financial condition and credit risk of our customers; the provision of customer discounts and credits; the mix of current and proposed products and services and the gross margins associated with our products and services; 24 • • • • • • • • • • • • • the timing required for new and future centers to open or become fully utilized; competition in the markets in which we operate; conditions related to international operations; increasing repair and maintenance expenses in connection with aging IBX data centers; lack of available capacity in our existing IBX data centers to generate new revenue or delays in opening up new or acquired IBX data centers that delay our ability to generate new revenue in markets which have otherwise reached capacity; changes in rent expense as we amend our IBX data center leases in connection with extending their lease terms when their initial lease term expiration dates approach or changes in shared operating costs in connection with our leases, which are commonly referred to as common area maintenance expenses; the timing and magnitude of other operating expenses, including taxes, expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets; the cost and availability of adequate public utilities, including power; changes in employee stock-based compensation; overall inflation; increasing interest expense due to any increases in interest rates and/or potential additional debt financings; changes in income tax benefit or expense; and changes in or new generally accepted accounting principles (GAAP) in the U.S. as periodically released by the Financial Accounting Standards Board (FASB). Any of the foregoing factors, or other factors discussed elsewhere in this report, could have a material adverse effect on our business, results of operations and financial condition. Although we have experienced growth in revenues in recent quarters, this growth rate is not necessarily indicative of future operating results. Prior to 2008, we had generated net losses every fiscal year since inception. It is possible that we may not be able to generate net income on a quarterly or annual basis in the future. In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expenses, depreciation and amortization and interest expenses. Therefore, our results of operations are particularly sensitive to fluctuations in revenues. As such, comparisons to prior reporting periods should not be relied upon as indications of our future performance. In addition, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors. If this occurs, we could experience an immediate and significant decline in the trading price of our securities. The failure to obtain favorable terms when we renew our IBX data center leases could harm our business and results of operations. While we own certain of our IBX data centers, others are leased under long-term arrangements with lease terms expiring at various dates ranging from 2011 to 2035. These leased centers have all been subject to significant development by us in order to convert them from, in most cases, vacant buildings or warehouses into IBX data centers. Most of our IBX data center leases have renewal options available to us. However, many of these renewal options provide for rent set at then-prevailing market rates. To the extent that then-prevailing market rates are higher than present rates, these higher costs may adversely impact our business and results of operations. 25 We depend on a number of third parties to provide Internet connectivity to our IBX data centers; if connectivity is interrupted or terminated, our operating results and cash flow could be materially and adversely affected. The presence of diverse telecommunications carriers’ fiber networks in our IBX data centers is critical to our ability to retain and attract new customers. We are not a telecommunications carrier, and as such we rely on third parties to provide our customers with carrier services. We believe that the availability of carrier capacity will directly affect our ability to achieve our projected results. We rely primarily on revenue opportunities from the telecommunications carriers’ customers to encourage them to invest the capital and operating resources required to connect from their centers to our IBX data centers. Carriers will likely evaluate the revenue opportunity of an IBX data center based on the assumption that the environment will be highly competitive. We cannot provide assurance that each and every carrier will elect to offer its services within our IBX data centers or that once a carrier has decided to provide Internet connectivity to our IBX data centers that it will continue to do so for any period of time. Our new IBX data centers require construction and operation of a sophisticated redundant fiber network. The construction required to connect multiple carrier facilities to our IBX data centers is complex and involves factors outside of our control, including regulatory processes and the availability of construction resources. Any hardware or fiber failures on this network may result in significant loss of connectivity to our new IBX data center expansions. This could affect our ability to attract new customers to these IBX data centers or retain existing customers. If the establishment of highly diverse Internet connectivity to our IBX data centers does not occur, is materially delayed or is discontinued, or is subject to failure, our operating results and cash flow will be adversely affected. We may be vulnerable to security breaches which could disrupt our operations and have a material adverse effect on our financial performance and operating results. A party who is able to compromise the security measures on our networks or the security of our infrastructure could misappropriate either our proprietary information or the personal information of our customers, or cause interruptions or malfunctions in our operations. We may be required to expend significant capital and resources to protect against such threats or to alleviate problems caused by breaches in security. As techniques used to breach security change frequently, and are generally not recognized until launched against a target, we may not be able to implement security measures in a timely manner or, if and when implemented, we may not be certain whether these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, regulatory penalties, loss of existing or potential customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial performance and operating results. We have government customers, which subjects us to risks including early termination, audits, investigations, sanctions and penalties. We derive some revenues from contracts with the U.S. government, state and local governments and their respective agencies. Some of these customers may terminate all or part of their contracts at any time, without cause. There is increased pressure for governments and their agencies, both domestically and internationally, to reduce spending. Some of our federal government contracts are subject to the approval of appropriations being made by the U.S. Congress to fund the expenditures under these contracts. Similarly, some of our contracts at the state and local levels are subject to government funding authorizations. 26 Additionally, government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business. Because we depend on the development and growth of a balanced customer base, including key magnet customers, failure to attract and retain this base of customers could harm our business and operating results. Our ability to maximize revenues depends on our ability to develop and grow a balanced customer base, consisting of a variety of companies, including enterprises, cloud, digital content and financial companies, and network service providers. We consider certain of these customers to be key magnets in that they draw in other customers. The more balanced the customer base within each IBX data center, the better we will be able to generate significant interconnection revenues, which in turn increases our overall revenues. Our ability to attract customers to our IBX data centers will depend on a variety of factors, including the presence of multiple carriers, the mix of products and services offered by us, the overall mix of customers, the presence of key customers attracting business through vertical market ecosystems, the IBX data center’s operating reliability and security and our ability to effectively market our services. However, some of our customers may face competitive pressures and may ultimately not be successful or may be consolidated through merger or acquisition. If these customers do not continue to use our IBX data centers it may be disruptive to our business. Finally, the uncertain economic climate may harm our ability to attract and retain customers if customers slow spending, or delay decision-making, on our products and services, or if customers begin to have difficulty paying us and we experience increased churn in our customer base. Any of these factors may hinder the development, growth and retention of a balanced customer base and adversely affect our business, financial condition and results of operations. We are subject to securities class action and other litigation, which may harm our business and results of operations. We are subject to various legal proceedings as described in Note 13 to Notes to Consolidated Financial Statements in this Annual Report on Form 10-K. In addition, we may, in the future, be subject to other litigation. For example, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Litigation can be lengthy, expensive, and divert management’s attention and resources. Results cannot be predicted with certainty and an adverse outcome in litigation could result in monetary damages or injunctive relief that could seriously harm our business, results of operations, financial condition or cash flows. We may not be able to protect our intellectual property rights. We cannot assure that the steps taken by us to protect our intellectual property rights will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement. Government regulation may adversely affect our business. Various laws and governmental regulations, both in the U.S. and abroad, governing Internet related services, related communications services and information technologies remain largely unsettled, even in areas where there has been some legislative action. For example, the Federal Communications Commission recently issued a Notice of Inquiry for comments on proposed Internet rules and regulation of broadband that may result in 27 material changes in the regulations and contribution regime affecting us and our customers. Likewise, as part of a review of the current equity market structure, the Securities and Exchange Commission and the Commodity Futures Trading Commission have both sought comments regarding the regulation of independent data centers, such as Equinix, which provide colocation services for financial markets and exchanges. Such regulation may ultimately affect our provision of services. It also may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, telecommunications services and taxation, apply to the Internet and to related services such as ours and substantial resources may be required to comply with regulations or bring any non-compliant business practices into compliance with such regulations. In addition, the development of the market for online commerce and the displacement of traditional telephony service by the Internet and related communications services may prompt an increased call for more stringent consumer protection laws or other regulation both in the U.S. and abroad that may impose additional burdens on companies conducting business online and their service providers. The adoption, or modification of laws or regulations relating to the Internet and our business, or interpretations of existing laws, could have a material adverse effect on our business, financial condition and results of operations. Industry consolidation may have a negative impact on our business model. The telecommunications industry is currently undergoing consolidation. As customers combine businesses, they may require less colocation space, and there may be fewer networks available to choose from. Given the competitive and evolving nature of this industry, further consolidation of our customers and/or our competitors may present a risk to our network-neutral business model and have a negative impact on our revenues. In addition, increased utilization levels industry-wide could lead to a reduced amount of attractive expansion opportunities available to us. Terrorist activity throughout the world and military action to counter terrorism could adversely impact our business. The continued threat of terrorist activity and other acts of war or hostility contribute to a climate of political and economic uncertainty. Due to existing or developing circumstances, we may need to incur additional costs in the future to provide enhanced security, including cybersecurity, which would have a material adverse effect on our business and results of operations. These circumstances may also adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our IBX data centers. We may not have adequate property and liability insurance to cover catastrophic events or attacks. We have various mechanisms in place that may discourage takeover attempts. Certain provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a third party from acquiring control of us in a merger, acquisition or similar transaction that a stockholder may consider favorable. Such provisions include: • • • • • authorization for the issuance of “blank check” preferred stock; the prohibition of cumulative voting in the election of directors; a super-majority voting requirement to effect business combinations or certain amendments to our certificate of incorporation and bylaws; limits on the persons who may call special meetings of stockholders; the prohibition of stockholder action by written consent; and 28 • advance notice requirements for nominations to the Board or for proposing matters that can be acted on by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law, which restricts certain business combinations with interested stockholders in certain situations, may also discourage, delay or prevent someone from acquiring or merging with us. ITEM 1B. UNRESOLVED STAFF COMMENTS There is no disclosure to report pursuant to Item 1B. ITEM 2. PROPERTIES Our executive offices are located in Redwood City, California, and we also have sales offices in several cities throughout the United States. Our Asia-Pacific headquarters office is located in Hong Kong and we also have office space in Singapore; Tokyo, Japan; and Sydney, Australia, which is operated out of our IBX data center there. Our European headquarters office is located in London, U.K. and our regional sales offices in Europe are based in our IBX data centers in Europe. We have entered into leases for certain of our IBX data centers in Dallas, Texas; Chicago, Illinois; Los Angeles, San Jose, Santa Clara and Sunnyvale, California; Newark and Secaucus, New Jersey; Hong Kong; Singapore; Sydney, Australia; Tokyo, Japan; London, U.K.; Paris, France; Frankfurt, Munich and Dusseldorf, Germany; Zurich and Geneva, Switzerland and Enschede and Zwolle, Netherlands. We own certain of our IBX data centers in Ashburn, Virginia; Chicago, Illinois; Los Angeles and San Jose, California, Frankfurt, Germany and Amsterdam, the Netherlands. We own campuses in Ashburn, Virginia and Frankfurt, Germany that house some of our IBX data centers mentioned in the preceding sentence. We assumed leases from the Switch and Data acquisition for IBX data centers in Phoenix, Arizona; Los Angeles, Palo Alto, San Jose and Sunnyvale, California; Englewood, Colorado; Miami and Tampa, Florida; Atlanta, Georgia; Chicago, Illinois; Indianapolis, Indiana; Dallas, Texas; Waltham, Massachusetts; Southfield, Mississippi; St. Louis, Missouri; North Bergen, New Jersey; Buffalo and New York, New York; Cleveland, Ohio; Philadelphia and Pittsburgh, Pennsylvania; Nashville, Tennessee; Reston and Vienna, Virginia; Seattle, Washington and Toronto, Canada. ITEM 3. LEGAL PROCEEDINGS IPO Litigation On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against us, certain of our officers and directors (the “Individual Defendants”), and several investment banks that were underwriters of our initial public offering (the “Underwriter Defendants”). The cases were filed in the United States District Court for the Southern District of New York. Similar lawsuits were filed against approximately 300 other issuers and related parties. These lawsuits have been coordinated before a single judge. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against us and the Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege that the Underwriter Defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for our initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. On February 19, 2003, the court dismissed the Section 10(b) claim against us, but denied the motion to dismiss the Section 11 claim. The parties in the approximately 300 coordinated cases, including the parties in the Equinix case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the 29 conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On October 6, 2009, the Court granted final approval to the settlement. Six notices of appeal and one petition seeking permission to appeal were filed. Objectors to the settlement have filed briefs in support of two separate appeals. The remaining objectors have withdrawn their appeals with prejudice. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter. We are unable at this time to determine whether the outcome of the litigation would have a material impact on our results of operations, financial condition or cash flows. We intend to continue to defend the action vigorously if the settlement does not survive the appeal. Pihana Litigation On August 22, 2008, a complaint was filed against Equinix, certain former officers and directors of Pihana Pacific, Inc. (“Pihana”), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawaii, and arises out of December 2002 agreements pursuant to which Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the Internet exchange services business of Equinix. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana’s majority shareholders, officers and directors, with the alleged assistance of Equinix and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly “believe may be all or a substantial portion of the approximately $725.0 million value of Equinix held by Defendants” (a group that includes more than 30 individuals and entities). An amended complaint, which adds new plaintiffs (other alleged holders of Pihana common stock) but is otherwise substantially similar to the original pleading, was filed on September 29, 2008 (the “Amended Complaint”). On October 13, 2008, a complaint was filed in a separate action by another purported holder of Pihana common stock, naming the same defendants and asserting substantially similar allegations as the August 22, 2008 and September 29, 2008 pleadings. On December 12, 2008, the court entered a stipulated order, which consolidated the two actions under one case number and set January 22, 2009 as the last day for Defendants to move to dismiss or otherwise respond to the Amended Complaint, the operative complaint in this case. On January 22, 2009, motions to dismiss the Amended Complaint were filed by Equinix and other Defendants. On April 24, 2009, plaintiffs filed a Second Amended Complaint (“SAC”) to correct the naming of certain parties. The SAC is otherwise substantively identical to the Amended Complaint, and all motions to dismiss the Amended Complaint have been treated as responsive to the SAC. On September 1, 2009, the Court heard Defendants’ motions to dismiss the SAC and ruled at the hearing that all claims against all Defendants are time-barred. The Court also considered whether there were further independent grounds for dismissing the claims, and supplemental briefing was submitted with respect to claims against one defendant and plaintiffs’ renewed request for further leave to amend. On March 23, 2010, the Court entered final Orders granting the motions to dismiss as to all Defendants and issued a minute Order denying plaintiffs’ renewed request for further leave to amend. On May 21, 2010, plaintiffs filed a Notice of Appeal, and plaintiffs’ appeal is currently pending before the Hawaii Supreme Court. We believe that plaintiffs’ claims and alleged damages are without merit and we intend to continue to defend the litigation vigorously. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the matter. We are unable at this time to determine whether the outcome of the litigation would have a material impact on our results of operations, financial condition or cash flows. 529 Bryant Litigation On September 10, 2010, a lawsuit was filed in the Superior Court of California in Santa Clara County by 529 Bryant Street Partners LLC (“Landlord”) against our wholly-owned subsidiaries Switch & Data CA Nine 30 LLC (“Tenant”) and Switch & Data Facilities Company, Inc. (“Guarantor”). The lawsuit alleged that Tenant breached certain non-monetary obligations under its lease (the “Lease”) of our data center located at 529 Bryant Street in Palo Alto, California (the “Premises”) and sought monetary damages, specific performance of those non-monetary obligations and ejectment of Tenant from the Premises. The lawsuit also alleged that Guarantor breached its obligations under its guaranty of the Lease. On November 10, 2010, Tenant and Landlord entered into an agreement pursuant to which Landlord agreed to dismiss its lawsuit against Tenant, and waive and release all claims against Tenant related thereto. In connection with the agreement, Tenant agreed to an increase in rent under the Lease and Landlord agreed to certain improved non-monetary lease terms. Equinix also agreed to guaranty the obligations of Tenant under the Lease. The lawsuit was dismissed with prejudice on November 15, 2010. ITEM 4. [REMOVED AND RESERVED] 31 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is quoted on the NASDAQ Global Select Market under the symbol of “EQIX.” Our common stock began trading in August 2000. The following table sets forth on a per share basis the low and high closing prices of our common stock as reported by the NASDAQ Global Select Market during the last two years. Fiscal 2010: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Fiscal Quarter Third Fiscal Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Fiscal Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Fiscal Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fiscal 2009: Fourth Fiscal Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Fiscal Quarter Second Fiscal Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Fiscal Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low High $70.34 78.57 79.45 91.76 $105.09 103.31 103.29 109.56 $85.32 67.19 57.62 42.26 $108.11 94.43 77.71 62.89 As of January 31, 2011, we had 46,198,990 shares of our common stock outstanding held by approximately 262 registered holders. We have never declared or paid any cash dividends on our common stock and we do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain our earnings, if any, for future growth. Future dividends on our common stock, if any, will be at the discretion of our Board of Directors and will depend on, among other things, our operations, capital requirements and surplus, general financial condition, contractual restrictions and such other factors that our Board of Directors may deem relevant. Furthermore, most of our senior creditors restrict us from paying dividends. During the year ended December 31, 2010, we did not issue or sell any securities on an unregistered basis. 32 Stock Performance Graph The graph set forth below compares the cumulative total stockholder return on Equinix’s common stock between December 31, 2005 and December 31, 2010 with the cumulative total return of (i) The NASDAQ Composite Index and (ii) The NASDAQ Telecommunications Index. This graph assumes the investment of $100.00 on December 31, 2005 in Equinix’s common stock, in The NASDAQ Composite Index, and in The NASDAQ Telecommunications Index, and assumes the reinvestment of dividends, if any. Equinix cautions that the stock price performance shown in the graph below is not indicative of, nor intended to forecast, the potential future performance of Equinix’s common stock. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN* Among Equinix, Inc., the NASDAQ Composite Index and the NASDAQ Telecommunications Index $300 $250 $200 $150 $100 $50 $0 12/05 3/06 6/06 9/06 12/06 3/07 6/07 9/07 12/07 3/08 6/08 9/08 12/08 3/09 6/09 9/09 12/09 3/10 6/10 9/10 12/10 Equinix, Inc. NASDAQ Composite NASDAQ Telecommunications *$100 invested on 12/31/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31. Notwithstanding anything to the contrary set forth in any of Equinix’s previous or future filings under the Securities Act of 1933, as amended, or Securities Exchange Act of 1934, as amended, that might incorporate this Form 10-K or future filings made by Equinix under those statutes, the stock performance graph shall not be deemed filed with the Securities and Exchange Commission and shall not be deemed incorporated by reference into any of those prior filings or into any future filings made by Equinix under those statutes. 33 ITEM 6. SELECTED FINANCIAL DATA The following consolidated statement of operations data for the five years ended December 31, 2010 and the consolidated balance sheet data as of December 31, 2010, 2009, 2008, 2007 and 2006 have been derived from our audited consolidated financial statements and the related notes. Our historical results are not necessarily indicative of the results to be expected for future periods. The following selected consolidated financial data for the three years ended December 31, 2010 and as of December 31, 2010 and 2009, should be read in conjunction with our audited consolidated financial statements and the related notes in Item 8 of this Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K. In addition, in April 2010, we completed our acquisition of Switch & Data Facilities Company, Inc., which was a significant acquisition. For further information on this acquisition, refer to Note 2 of our Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Years ended December 31, 2010 2009 2008 2007 2006 (dollars in thousands, except per share data) Consolidated Statement of Operations Data: Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,220,334 $ 882,509 $ 704,680 $ 419,442 $ 286,915 Costs and operating expenses: Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674,667 111,104 220,781 6,734 12,337 — 483,420 63,584 155,324 (6,053) 5,155 — 414,799 66,913 146,564 3,142 — — 263,768 40,719 105,794 407 — (1,338) 188,379 32,619 72,123 1,527 — (9,647) Total costs and operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025,623 701,430 631,418 409,350 285,001 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other-than-temporary impairment recovery (loss) on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense) Loss on debt extinguishment and conversion and interest rate swaps, net . . . . . . . . . . . . Income tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative effect of a change in accounting principle . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,711 1,515 (140,475) 3,626 690 (10,187) (12,999) — 181,079 2,384 (74,232) (2,590) 2,387 — (39,597) — 73,262 8,940 (61,677) (1,527) 1,307 — 87,619 — 10,092 15,406 (32,014) — 3,047 (5,949) (473) — 1,914 6,627 (14,630) — (245) — (439) 376 Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,881 $ 69,431 $ 107,924 $ (9,891) $ (6,397) Earnings (loss) per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.84 $ 1.80 $ 2.91 $ (0.30) $ (0.22) Weighted average shares—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,742 38,488 37,120 32,595 28,796 Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.82 $ 1.75 $ 2.79 $ (0.30) $ (0.22) Weighted average shares—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,810 39,676 41,582 32,595 28,796 Other Financial Data (1): Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392,872 $ 355,492 $ 267,558 $ Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (558,178) 323,598 (600,969) 309,686 120,020 $ 75,412 (478,040) (1,054,725) (158,470) 46,107 1,145,013 145,106 As of December 31, 2010 2009 2008 2007 2006 (dollars in thousands) Consolidated Balance Sheet Data: Cash, cash equivalents and short-term and long-term investments . . . . . . . . . . . . . . . . . . $ 592,839 $ 604,367 $ 307,945 $ Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease and other financing obligations, excluding current portion . . . . . . . . . . . . . Mortgage and loans payable, excluding current portion . . . . . . . . . . . . . . . . . . . . . . . . . . Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible debt, excluding current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116,358 2,650,953 4,448,009 253,945 100,337 750,000 916,337 1,880,515 64,767 1,808,115 3,038,150 154,577 371,322 — 893,706 1,182,483 66,029 1,492,830 2,434,736 133,031 386,446 — 608,510 916,661 60,089 1,164,613 2,182,296 93,604 313,915 383,900 $ 156,481 26,864 546,395 771,832 92,722 96,746 — 86,250 355,028 631,104 861,992 — (1) For a discussion of our primary non-GAAP financial metric, adjusted EBITDA, see our non-GAAP financial measures discussion in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K. 34 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following commentary should be read in conjunction with the financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. The information in this discussion contains forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. For example, the words “believes,” “anticipates,” “plans,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a discrepancy include, but are not limited to, those discussed in “Liquidity and Capital Resources” and “Risk Factors” elsewhere in this Annual Report on Form 10-K. All forward-looking statements in this document are based on information available to us as of the date hereof and we assume no obligation to update any such forward-looking statements. Our management’s discussion and analysis of financial condition and results of operations is intended to assist readers in understanding our financial information from our management’s perspective and is presented as follows: • Overview • Results of Operations • Non-GAAP Financial Measures • Liquidity and Capital Resources • Contractual Obligations and Off-Balance-Sheet Arrangements • Critical Accounting Policies and Estimates • Recent Accounting Pronouncements In February 2010, we issued $750.0 million aggregate principal amount of 8.125% senior notes due March 1, 2018 which we refer to as the senior notes offering. On April 30, 2010, as more fully described in Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, we completed the acquisition of Switch & Data Facilities Company, Inc., referred to as Switch and Data, a publicly-held company headquartered in Tampa, Florida. We refer to this transaction as the Switch and Data acquisition. Switch and Data operated 34 data centers in the U.S. and Canada. The combined company operates under the Equinix name. Overview Equinix provides global data center services that protect and connect the world’s most valued information assets. Global enterprises, financial services companies, and content and network service providers rely upon Equinix’s leading insight and 92 data centers in 35 markets around the world for the safeguarding of their critical IT equipment and the ability to directly connect to the networks that enable today’s information-driven economy. Equinix offers the following data center services: premium data center colocation, interconnection and exchange services, and outsourced IT infrastructure services. As of December 31, 2010, we operated or had partner IBX data centers in the Atlanta, Boston, Buffalo, Chicago, Cleveland, Dallas, Denver, Detroit, Indianapolis, Los Angeles, Miami, Nashville, New York, Philadelphia, Phoenix, Pittsburgh, Seattle, Silicon Valley, St. Louis, Tampa, Toronto and Washington, D.C. metro areas in North America; France, Germany, the Netherlands, Switzerland and the United Kingdom in Europe; and Australia, Hong Kong, Japan, Shanghai and Singapore in Asia-Pacific. 35 We leverage our global data centers in 35 markets around the world as a global service delivery platform which serves more than 90% of the world’s Internet routes and allows our customers to increase information and application delivery performance while significantly reducing costs. Based on our global delivery platform and the quality of our IBX data centers, we believe we have established a critical mass of customers. As more customers locate in our IBX data centers, it benefits their suppliers and business partners to colocate as well in order to gain the full economic and performance benefits of our services. These partners, in turn, pull in their business partners, creating a “marketplace” for their services. Our global delivery platform enables scalable, reliable and cost-effective colocation, interconnection and traffic exchange thus lowering overall cost and increasing flexibility. Our focused business model is based on our critical mass of customers and the resulting “marketplace” effect. This global delivery platform, combined with our strong financial position, continues to drive new customer growth and bookings as we drive scale into our global business. Historically, our market has been served by large telecommunications carriers who have bundled their telecommunications products and services with their colocation offerings. The data center services market landscape has evolved to include cloud computing/utility providers, application hosting providers and systems integrators, managed infrastructure hosting providers and colocation providers with over 350 companies providing data center services in the United States alone. Each of these data center services providers can bundle various colocation, interconnection and network services, and outsourced IT infrastructure services. We are able to offer our customers a global platform that supports global reach to 12 countries, proven operational reliability, improved application performance and network choice, and a highly scalable set of services. Our customer count increased to 3,916 as of December 31, 2010 versus 2,612 as of December 31, 2009, an increase of 50%. This increase was due both to the Switch and Data acquisition in April 2010 and organic growth in our business. Our utilization rate represents the percentage of our cabinet space billing versus net sellable cabinet space available taking into account power limitations. Excluding the impact of the Switch and Data acquisition, our utilization rate decreased to 76% as of December 31, 2010 versus approximately 79% as of December 31, 2009; however, excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our utilization rate would have increased to approximately 84% as of December 31, 2010. Including the impact of the Switch and Data acquisition, our utilization rate was 74% as of December 31, 2010. Our utilization rate varies from market to market among our IBX data centers across the North America, Europe and Asia-Pacific regions. We continue to monitor the available capacity in each of our selected markets. To the extent we have limited capacity available in a given market it may limit our ability for growth in that market. We perform demand studies on an ongoing basis to determine if future expansion is warranted in a market. In addition, power and cooling requirements for most customers are growing on a per unit basis. As a result, customers are consuming an increasing amount of power per cabinet. Although we generally do not control the amount of power our customers draw from installed circuits, we have negotiated power consumption limitations with certain of our high power demand customers. This increased power consumption has driven the requirement to build out our new IBX data centers to support power and cooling needs twice that of previous IBX data centers. We could face power limitations in our centers even though we may have additional physical cabinet capacity available within a specific IBX data center. This could have a negative impact on the available utilization capacity of a given center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows. Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and service offerings. As was the case with our recent expansions and acquisitions, our expansion criteria will be dependent on a number of factors such as demand from new and existing customers, quality of the design, power capacity, access to networks, capacity availability in the current market location, amount of incremental investment required by us in the targeted property, lead-time to break-even and in-place customers. Like our recent expansions and acquisitions, the right combination of these factors may be attractive to us. Depending on the circumstances, these transactions may require additional capital expenditures funded by upfront cash payments or through long-term financing arrangements, in order to bring these properties up to 36 Equinix standards. Property expansion may be in the form of purchases of real property, long-term leasing arrangements or acquisitions. Future purchases, construction or acquisitions may be completed by us or with partners or potential customers to minimize the outlay of cash, which can be significant. Our business is based on a recurring revenue model comprised of colocation, interconnection and managed infrastructure services. We consider these services recurring as our customers are generally billed on a fixed and recurring basis each month for the duration of their contract, which is generally one to three years in length. Our recurring revenues have comprised more than 90% of our total revenues during the past three years. In addition, during the past three years, in any given quarter, greater than half of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth. Our non-recurring revenues are primarily comprised of installation services related to a customer’s initial deployment and professional services that we perform. These services are considered to be non-recurring as they are billed typically once and upon completion of the installation or professional services work performed. The majority of these non-recurring revenues are typically billed on the first invoice distributed to the customer in connection with their initial installation. However, revenues from installation services are deferred and recognized ratably over the longer of the term of the related contract or expected life of the services. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future. Our North America revenues are derived primarily from colocation and interconnection services while our Europe and Asia-Pacific revenues are derived primarily from colocation and managed infrastructure services. The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX data centers, utility costs, including electricity and bandwidth, IBX data center employees’ salaries and benefits, including stock-based compensation, repairs and maintenance, supplies and equipment and security services. A substantial majority of our cost of revenues is fixed in nature and should not vary significantly from period to period, unless we expand our existing IBX data centers or open or acquire new IBX data centers. However, there are certain costs which are considered more variable in nature, including utilities and supplies, that are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, will increase in the future on a per-unit or fixed basis in addition to the variable increase related to the growth in consumption by the customer. In addition, the cost of electricity is generally higher in the summer months as compared to other times of the year. To the extent we incur increased utility costs; such increased costs could materially impact our financial condition, results of operations and cash flows. Furthermore, to the extent we incur increased electricity costs as a result of either climate change policies or the physical effects of climate change; such increased costs could materially impact our financial condition, results of operations and cash flows. Sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including stock-based compensation, sales commissions, marketing programs, public relations, promotional materials and travel, as well as bad debt expense and amortization of customer contract intangible assets. General and administrative expenses consist primarily of salaries and related expenses, including stock- based compensation, accounting, legal and other professional service fees, and other general corporate expenses such as our corporate regional headquarters office leases and some depreciation expense. Due to our recurring revenue model, and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth, we expect our cost of revenues, sales and marketing expenses and general and administrative expenses to decline as a percentage of revenue over time, although we expect each of them to grow in absolute dollars in connection with our growth. This is evident in the trends noted below in our discussion on our results of operations. However, for cost of revenues, this trend may periodically be impacted when a large expansion project opens or is acquired and before it starts generating any meaningful 37 revenue. Furthermore, in relation to cost of revenues, we note that the North America region has a lower cost of revenues as a percentage of revenue than either Europe or Asia-Pacific. This is due to both the increased scale and maturity of the North America region compared to either Europe or Asia-Pacific, as well as a higher cost structure outside of North America, particularly in Europe. While we expect all three regions to continue to see lower cost of revenues as a percentage of revenues in future periods, we expect the trend of North America having the lowest cost of revenues as a percentage of revenue and Europe having the highest to continue. As a result, to the extent that revenue growth outside North America grows in greater proportion than revenue growth in North America, our overall cost of revenues as a percentage of revenues may increase in future periods. Sales and marketing expenses and general and administrative expenses may also periodically increase as a percentage of revenue as we continue to scale our operations to support our growth. Results of Operations Our results of operations for the year ended December 31, 2010 include the operations of Switch and Data from May 1, 2010. Our results of operations for the year ended December 31, 2009 include the operations of Upminster from July 22, 2009. Our results of operations for the year ended December 31, 2008 include the operations of Virtu from February 5, 2008. Constant Currency Presentation Our revenues and certain operating expenses (cost of revenues, sales and marketing and general and administrative expenses) from our international operations have represented and will continue to represent a significant portion of our total revenues and certain operating expenses. As a result, our revenues and certain operating expenses have been and will continue to be affected by changes in the U.S. dollar against major international currencies such as the British pound, Canadian dollar, Euro, Swiss franc, Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present year-over-year percentage changes in our revenues and certain operating expenses on a constant currency basis in addition to the historical amounts as reported. Presenting constant currency results of operations is a non-GAAP financial measure and is not meant to be considered in isolation or as an alternative to GAAP results of operations. However, we have presented this non-GAAP financial measure to provide investors with an additional tool to evaluate our operating results. To present this information, our current and comparative prior period revenues and certain operating expenses from entities reporting in currencies other than the U.S. dollar are converted into U.S. dollars at constant exchange rates rather than the actual exchange rates in effect during the respective periods (i.e. average rates in effect for the year ended December 31, 2009 are used as exchange rates for the year ended December 31, 2010 when comparing the year ended December 31, 2010 with the year ended December 31, 2009 and average rates in effect for the year ended December 31, 2008 are used as exchange rates for the year ended December 31, 2009 when comparing the year ended December 31, 2009 with the year ended December 31, 2008). For the year ended December 31, 2010, our North America operations consisted of the U.S. operations and Canadian operations which were added through the Switch and Data acquisition. 38 Years Ended December 31, 2010 and 2009 Revenues. Our revenues for the years ended December 31, 2010 and 2009 were generated from the following revenue classifications and geographic regions (dollars in thousands): Years ended December 31, % change 2010 % 2009 % Actual Constant currency North America: Recurring revenues . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . $ 748,648 27,527 61% $515,780 19,709 3% Europe: Recurring revenues . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . Asia-Pacific: Recurring revenues . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . 776,175 64% 535,489 256,570 25,223 281,793 155,200 7,166 162,366 21% 212,635 15,501 2% 23% 228,136 13% 113,434 5,450 0% 13% 118,884 Total: Recurring revenues . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . 1,160,418 59,916 95% 841,849 40,660 5% 59% 2% 61% 24% 2% 26% 12% 1% 13% 95% 5% $1,220,334 100% $882,509 100% 45% 40% 45% 21% 63% 24% 37% 31% 37% 38% 47% 38% 45% 40% 45% 25% 65% 28% 27% 21% 27% 37% 48% 38% North America Revenues. The increase in North America revenues was primarily due to the impact of the Switch and Data acquisition, which resulted in $153.0 million of additional revenue for the year ended December 31, 2010. The following table presents our North America revenues excluding the impact of the Switch and Data acquisition (dollars in thousands): Years ended December 31, Change 2010 2009 $ % North America: Recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $598,860 24,355 $515,780 19,709 $83,080 4,646 $623,215 $535,489 $87,726 16% 24% 16% Excluding the impact of the Switch and Data acquisition, the period over period growth in revenues was primarily the result of an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. Additionally, during the year ended December 31, 2010, we recorded $33.0 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Los Angeles, New York, Silicon Valley and Washington, D.C. metro areas. We expect that our North America revenues, including those of the acquired Switch and Data operations, will continue to grow in future periods as a result of continued growth in the recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Atlanta and Dallas metro areas, which are expected to open during the first half of 2011. Our estimates of future revenue growth take account of expected reductions in recurring revenues attributed to customer churn or changes or amendments to customers’ contracts. 39 Europe Revenues. During the year ended December 31, 2010, our revenues from Germany, the largest revenue contributor in the Europe region for the period, represented approximately 36% of the regional revenues. During the year ended December 31, 2009, our revenues from the United Kingdom, the largest revenue contributor in the Europe region for the period, represented approximately 36% of the regional revenues. Our Europe revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the year ended December 31, 2010, we recorded approximately $29.9 million of revenue from our recently-opened IBX data centers or IBX data center expansions in the Amsterdam, Dusseldorf, Frankfurt, London, Munich, Paris and Zurich metro areas. Our Europe revenue growth includes a $4.2 million increase in equipment resales for the year ended December 31, 2010. During the year ended December 31, 2010, the U.S. dollar was generally stronger relative to the British pound, Euro and Swiss franc than during the year ended December 31, 2009, resulting in approximately $9.6 million of unfavorable foreign currency impact to our Europe revenues during the year ended December 31, 2010 when compared to average 2009 exchange rates. We expect that our Europe revenues will continue to grow in future periods as a result of continued growth in recently-opened IBX data centers or IBX data center expansions and additional expansions currently taking place in the Amsterdam, Frankfurt, London and Paris metro areas, which are expected to open during 2011. Our estimates of future revenue growth take account of expected reductions in recurring revenues attributed to customer churn or changes or amendments to customers’ contracts. Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 38% and 36%, respectively, of the regional revenues for the years ended December 31, 2010 and 2009. Our Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the year ended December 31, 2010, we recorded approximately $5.4 million of revenue generated from our IBX center expansions in the Hong Kong and Singapore metro areas. During the year ended December 31, 2010, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the year ended December 31, 2009, resulting in approximately $11.2 million of favorable foreign currency impact to our Asia-Pacific revenues during the year ended December 31, 2010 when compared to average 2009 exchange rates. We expect that our Asia-Pacific revenues will continue to grow in future periods as a result of continued growth in these recently-opened IBX center expansions and additional expansions currently taking place in the Hong Kong, Singapore, Sydney and Tokyo metro areas which are expected to open during 2011. Our estimates of future revenue growth take account of expected reductions in recurring revenues attributed to customer churn or changes or amendments to customers’ contracts. Cost of Revenues. Our cost of revenues for the years ended December 31, 2010 and 2009 were split among the following geographic regions (dollars in thousands): Years ended December 31, % change North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $408,769 176,937 88,961 61% $269,242 26% 144,875 69,303 13% 56% 52% 30% 22% 14% 28% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $674,667 100% $483,420 100% 40% 2010 % 2009 % Actual Constant currency 52% 26% 20% 39% Cost of revenues as a percentage of revenues: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Years ended December 31, 2010 2009 53% 63% 55% 55% 50% 64% 58% 55% North America Cost of Revenues. The increase in our North America cost of revenues was primarily due to the impact of the Switch and Data acquisition, which resulted in $109.6 million of additional cost of revenues for the year ended December 31, 2010. Our North America cost of revenues for the years ended December 31, 2010 and 2009 included $150.4 million and $99.3 million, respectively, of depreciation expense, including $39.6 million of depreciation expense from the impact of the Switch and Data acquisition for the year ended December 31, 2010. Excluding the impact of the Switch and Data acquisition, our North America cost of revenues during the year ended December 31, 2010 was $299.1 million, which represents an increase of 11% from the year ended December 31, 2009. Growth in depreciation expense was primarily due to our IBX center expansion activity. During the year ended December 31, 2009, we revised the estimated useful lives of certain of our property, plant and equipment on a prospective basis effective July 1, 2009 resulting in a $7.1 million decrease in depreciation expense for the year then ended. Excluding depreciation, the increase was primarily due to overall growth related to our revenue growth and costs associated with our expansion projects, including (i) an increase of $7.2 million in rent and facility costs, (ii) an increase of $4.3 million in utility costs as a result of increased customer installations and (iii) a $3.0 million increase in property tax expense. We expect North America cost of revenues to increase as we continue to grow our business. Europe Cost of Revenues. Europe cost of revenues for the years ended December 31, 2010 and 2009 included $53.7 million and $37.1 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. During the year ended December 31, 2009, we revised the estimated useful lives of certain of our property, plant and equipment on a prospective basis effective July 1, 2009 resulting in a $523,000 decrease in depreciation expense for the year then ended and we recorded a $4.2 million decrease in depreciation expense for the year then ended as an out-of-period adjustment related to incorrectly depreciating certain assets. This $4.2 million out-of-period adjustment represents the correction of errors attributable to the nine months ended September 30, 2009 and the years ended December 31, 2008 and 2007. Excluding depreciation expense, the increase in Europe cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $4.2 million of higher compensation expense, including general salaries, bonuses and headcount growth (253 Europe employees as of December 31, 2010 versus 184 as of December 31, 2009), (ii) $3.5 million of costs associated with equipment resales, (iii) an increase of $3.1 million in utility costs arising from increased customer installations and revenues attributed to customer growth, (iv) $2.1 million of higher repair and maintenance costs, (v) $1.3 million of higher rent and facility costs and (vi) $1.2 million of higher third-party services such as security and various consulting services. During the year ended December 31, 2010, the U.S. dollar was generally stronger relative to the British pound, Euro and Swiss franc than during the year ended December 31, 2009, resulting in approximately $6.0 million of favorable foreign currency impact to our Europe cost of revenues during the year ended December 31, 2010 when compared to average 2009 exchange rates. We expect Europe cost of revenues to increase as we continue to grow our business. Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the years ended December 31, 2010 and 2009 included $28.1 million and $24.4 million, respectively, of depreciation expense. Growth in depreciation expense was primarily due to our IBX center expansion activity. During the year ended December 31, 2009, we revised the estimated useful lives of certain of our property, plant and equipment on a prospective basis effective July 1, 2009 resulting in a $4.4 million decrease in depreciation expense for the year then ended. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) $6.1 million in higher utility costs, (ii) an increase of $4.6 million of rent and facility costs and (iii) $2.1 million of higher compensation expense, including general salaries, bonuses, stock-based compensation and headcount growth (104 Asia-Pacific employees as of December 31, 2010 versus 85 as of December 31, 2009). During the year ended December 31, 2010, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the year ended December 31, 2009, resulting in 41 approximately $5.7 million of unfavorable foreign currency impact to our Asia-Pacific cost of revenues during the year ended December 31, 2010 when compared to average 2009 exchange rates. We expect Asia-Pacific cost of revenues to increase as we continue to grow our business. Sales and Marketing Expenses. Our sales and marketing expenses for the years ended December 31, 2010 and 2009 were split among the following geographic regions (dollars in thousands): Years ended December 31, % change 2010 % 2009 % Actual Constant currency North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,944 24,071 14,089 65% $35,900 22% 17,755 9,929 13% 56% 103% 103% 40% 36% 28% 35% 42% 16% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $111,104 100% $63,584 100% 75% 75% Sales and marketing expenses as a percentage of revenues: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2010 2009 9% 9% 9% 9% 7% 8% 8% 7% North America Sales and Marketing Expenses. The increase in our North America sales and marketing expenses was primarily due to the impact of the Switch and Data acquisition, which resulted in $16.0 million of additional sales and marketing expenses, including $6.0 million of amortization expense for customer contracts, for the year ended December 31, 2010. Excluding the impact of the Switch and Data acquisition, our North America sales and marketing expenses during the year ended December 31, 2010 were $56.9 million, which represents an increase of 59% from the year ended December 31, 2009. This increase was primarily due to (i) $14.3 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (147 North America sales and marketing employees as of December 31, 2010 versus 112 as of December 31, 2009), (ii) $3.3 million of higher costs related to travel and marketing programs and (iii) $1.1 million of higher bad debt expense. We have been investing in our North America sales and marketing initiatives to further increase our revenue and we anticipate this increased investment will continue over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, our North America sales and marketing expenses as a percentage of revenues have increased and are expected to continue to increase. In the long-term, we generally expect North America sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease. Europe Sales and Marketing Expenses. The increase in our Europe sales and marketing expenses was primarily due to $3.7 million of higher compensation costs, including sales compensation, general salaries, bonuses, stock-based compensation expense and headcount growth (80 Europe sales and marketing employees as of December 31, 2010 versus 55 as of December 31, 2009) and $1.1 million of higher costs related to travel and marketing programs. For the year ended December 31, 2010, the impact of foreign currency fluctuations to our Europe sales and marketing expenses was not significant when compared to average 2009 exchange rates. We intend to invest further in our Europe sales and marketing initiatives over the next several years, including 42 anticipated headcount growth and new product innovation efforts and, as a result, we expect our Europe sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Europe sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease. Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to $2.7 million of higher compensation costs, including sales compensation, general salaries, bonuses and headcount growth (51 Asia-Pacific sales and marketing employees as of December 31, 2010 versus 44 as of December 31, 2009); however, our Asia-Pacific sales and marketing expenses for the year ended December 31, 2010 included the benefit of a $680,000 accrual reversal associated with adjusting the estimated costs of an annual sales recognition program which is an out-of-period adjustment. This $680,000 out-of-period adjustment represents the correction of errors attributable to the year ended December 31, 2009, which we have concluded was not material to any previously-reported historical annual or quarterly period for the year ended December 31, 2009. For the year ended December 31, 2010, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average 2009 exchange rates. We intend to invest further in our Asia-Pacific sales and marketing initiatives over the next several years, including anticipated headcount growth and new product innovation efforts and, as a result, we expect our Asia- Pacific sales and marketing expenses as a percentage of revenues to increase accordingly. In the long-term, we generally expect Asia-Pacific sales and marketing expenses to increase as we continue to grow our business and invest further in various branding initiatives; however, as a percentage of revenues, we generally expect them to decrease. General and Administrative Expenses. Our general and administrative expenses for the years ended December 31, 2010 and 2009 were split among the following geographic regions (dollars in thousands): Years ended December 31, % change North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $155,516 44,791 20,474 71% $104,141 33,240 20% 17,943 9% 67% 49% 21% 35% 12% 14% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,781 100% $155,324 100% 42% 2010 % 2009 % Actual Constant currency 49% 37% 8% 42% General and administrative expenses as a percentage of revenues: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2010 2009 20% 16% 13% 18% 19% 15% 15% 18% North America General and Administrative Expenses. The increase in our North America general and administrative expenses was primarily due to the impact of the Switch and Data acquisition, which resulted in $21.3 million of additional general and administrative expenses for the year ended December 31, 2010. Excluding the impact of the Switch and Data acquisition, our North America general and administrative expenses during the year ended December 31, 2010 were $134.2 million, which represents an increase of 29% from the year ended December 31, 2009. This increase in our North America general and administrative expenses was primarily due to (i) $20.8 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (396 North America general and administrative employees as of December 31, 2010 versus 298 as of December 31, 2009), (ii) $2.2 million of higher 43 depreciation expense as a result of our ongoing efforts to support our growth, such as investment in systems, (iii) an increase of $2.1 million in professional services related to various consulting projects and (iv) $1.9 million of higher costs related to our headquarters expansion to facilitate our growth. During 2010, we have been investing in our North America general and administrative functions, which has included taking on additional office space to accommodate the headcount growth, as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect North America general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease. Europe General and Administrative Expenses. The increase in our Europe general and administrative expenses was primarily due to $5.9 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (149 Europe general and administrative employees as of December 31, 2010 versus 109 as of December 31, 2009) and $2.9 million of higher professional services related to various consulting projects to support our growth. During the year ended December 31, 2010, the U.S. dollar was generally stronger relative to the British pound, Euro and Swiss franc than during the year ended December 31, 2009, resulting in approximately $865,000 of favorable foreign currency impact to our Europe general and administrative expenses during the year ended December 31, 2010 when compared to average 2009 exchange rates. During 2010, we have been investing in our Europe general and administrative functions, which has included taking on additional office space to accommodate the headcount growth, as a result of our ongoing efforts to scale this region effectively for growth. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect our Europe general and administrative expenses to increase in future periods as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease. Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $1.9 million of higher compensation costs, including general salaries, bonuses, stock-based compensation and headcount growth (128 Asia-Pacific general and administrative employees as of December 31, 2010 versus 105 as of December 31, 2009). During the year ended December 31, 2010, the U.S. dollar was generally weaker relative to the Australian dollar, Hong Kong dollar, Japanese yen and Singapore dollar than during the year ended December 31, 2009, resulting in approximately $1.1 million of unfavorable foreign currency impact to our Asia-Pacific general and administrative expenses during the year ended December 31, 2010 when compared to average 2009 exchange rates. Going forward, although we are carefully monitoring our spending given the current economic environment, we expect Asia-Pacific general and administrative expenses to increase as we continue to scale our operations to support our growth; however, as a percentage of revenues, we generally expect them to decrease. Restructuring Charges. During the year ended December 31, 2010, we recorded restructuring charges totaling $6.7 million comprised of $5.3 million related to one-time termination benefits attributed to certain Switch and Data employees and $1.4 million related to revised sublease assumptions on our excess leased space in the New York metro area. For additional information, see “Restructuring Charges” in Note 16 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. We anticipate that we will incur additional restructuring charges in connection with the Switch and Data acquisition related to one-time termination benefits during 2011. During the year ended December 31, 2009, we recorded reductions of restructuring charges totaling $6.1 million, primarily due to a reversal of a restructuring charge accrual of $5.8 million for our excess space in the Los Angeles metro area as a result of our decision to utilize this space to expand our original Los Angeles IBX data center. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. Our restructuring charges all relate to our North America geographic region. 44 Acquisition Costs. During the year ended December 31, 2010, we recorded acquisition costs totaling $12.3 million primarily related to the Switch and Data acquisition. During the year ended December 31, 2009, we recorded acquisition costs totaling $5.2 million, primarily related to the Upminster acquisition and the Switch and Data acquisition. Interest Income. Interest income decreased to $1.5 million for the year ended December 31, 2010 from $2.4 million for the year ended December 31, 2009. Interest income decreased primarily due to lower yields on invested balances. The average yield for the year ended December 31, 2010 was 0.18% versus 0.58% for the year ended December 31, 2009. We expect our interest income to remain at these low levels for the foreseeable future due to the impact of a lower interest rate environment, a portfolio more weighted towards short-term U.S. treasuries and from the utilization of cash to finance our expansion activities. Interest Expense. Interest expense increased to $140.5 million for the year ended December 30, 2010 from $74.2 million for the year ended December 31, 2009. This increase in interest expense was primarily due to additional financings entered into during 2009 and 2010 consisting of (i) our $750.0 million 8.125% senior notes offering in February 2010, (ii) our $373.8 million 4.75% convertible subordinated notes offering in June 2009 and (iii) our new Asia-Pacific financing in April 2010, of which $120.3 million was outstanding as of December 31, 2010 with an approximate interest rate of 4.86% per annum, which replaced both our previously- existing Asia-Pacific and Singapore financings. This increase was partially offset by our repayment of the Chicago IBX financing in March 2010, the European financing in April 2010 and the Netherlands financing in June 2010. During the years ended December 31, 2010 and 2009, we capitalized $10.3 million and $12.9 million, respectively, of interest expense to construction in progress. Going forward, we expect to incur higher interest expense as we recognize the full impact of our $750.0 million 8.125% senior notes and our new Asia-Pacific financing, although this has been partially offset by repayment of debt, such as the European financing and mortgage payable. We may also incur additional indebtedness to support our growth, resulting in further interest expense. Other-Than-Temporary Impairment Recovery (Loss) On Investments. During the year ended December 31, 2010, we recorded a $3.6 million other-than-temporary impairment recovery on investments due to additional distributions from one of our money market accounts as more fully described in Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. For the year ended December 31, 2009, we recorded $2.6 million of other-than-temporary impairment losses on this same money market account. Other Income (Expense). For the years ended December 31, 2010 and 2009, we recorded $690,000 and $2.4 million of other income, respectively, primarily due to foreign currency exchange gains during the years. Loss on debt extinguishment and interest rate swaps, net. During the year ended December 31, 2010, we recorded a $10.2 million loss on debt extinguishment and interest rate swaps, net. See “Loss on Debt Extinguishment and Interest Rate Swaps, Net” in Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. We did not record any loss on debt extinguishment and interest rate swaps, net, during the year ended December 31, 2009. Income Taxes. During the year ended December 31, 2010, we recorded $13.0 million of income tax expense. The tax expense recorded during the year ended December 31, 2010 was primarily a result of applying the effective statutory tax rates to our operating income adjusted for permanent tax adjustments for the period, partially offset by income tax benefits due to the release of valuation allowances of $5.2 million and $2.1 million associated with certain of our operating entities in Germany and Singapore, respectively. During the year ended December 31, 2009, we recorded $39.6 million of income tax expense. The tax expense recorded during the year ended December 31, 2009 was primarily a result of applying the effective statutory tax rates to our operating income adjusted for permanent tax adjustments for the period, partially offset by income tax benefits due to the release of valuation allowances of $3.1 million and $5.2 million associated with certain of our Hong Kong and U.K. operations, respectively. 45 Years Ended December 31, 2009 and 2008 Revenues. Our revenues for the years ended December 31, 2009 and 2008 were generated from the following revenue classifications and geographic regions (dollars in thousands): Years ended December 31, % change 2009 % 2008 % Actual Constant currency North America: Recurring revenues . . . . . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . . . . $515,780 19,709 59% $423,940 18,863 2% 535,489 61% 442,803 Europe: Recurring revenues . . . . . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . . . . Asia-Pacific: Recurring revenues . . . . . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . . . . 212,635 15,501 228,136 113,434 5,450 118,884 Total: 60% 3% 63% 24% 1% 25% 22% N/A 4% N/A 21% N/A 28% 31% 29% 41% 36% 41% 24% 165,669 11,833 2% 26% 177,502 12% 1% 13% 77,554 6,821 84,375 11% 46% 1% (20%) 46% (20%) 12% 41% 41% Recurring revenues . . . . . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . . . . 841,849 40,660 95% 667,163 37,517 5% 95% 5% $882,509 100% $704,680 100% 26% 8% 25% 29% 10% 28% North America Revenues. The period over period growth in recurring revenues was primarily the result of an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, as well as selective price increases in each of our IBX markets. During the year ended December 31, 2009, we recorded $67.7 million of revenue generated from our recently-opened IBX data centers or IBX data center expansions in the Chicago, Los Angeles and New York metro areas. Europe Revenues. Our revenues from the United Kingdom, the largest revenue contributor in the Europe region for the period, represented approximately 36% and 38%, respectively, of the regional revenues for the years ended December 31, 2009 and 2008. As in the U.S., Europe revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers. During the year ended December 31, 2009, we recorded approximately $49.4 million of revenue from our recently- opened IBX data centers or IBX data center expansions in the Amsterdam, Frankfurt, London and Paris metro areas. During the year ended December 31, 2009, the U.S. dollar was generally stronger relative to the British pound, Euro and Swiss franc than during the year ended December 31, 2008, resulting in approximately $22.1 million of unfavorable foreign currency impact to our Europe revenues during the year ended December 31, 2009 when compared to average 2008 exchange rates. Asia-Pacific Revenues. Our revenues from Singapore, the largest revenue contributor in the Asia-Pacific region, represented approximately 36% and 38%, respectively, of the regional revenues for the years ended December 31, 2009 and 2008. As in the U.S., Asia-Pacific revenue growth was due to an increase in orders from both our existing customers and new customers during the period as reflected in the growth in our customer count and utilization rate, as discussed above, in both our new and existing IBX data centers, as well as selective price increases in each of our IBX markets. During the year ended December 31, 2009, we recorded 46 approximately $25.7 million of revenue generated from our IBX data centers or IBX data center expansions in the Hong Kong, Singapore and Sydney metro areas. The decrease in Asia-Pacific non-recurring revenue was primarily due to higher revenue from equipment resales in 2008. For the year ended December 31, 2009, the impact of foreign currency fluctuations to our Asia-Pacific revenues was not significant when compared to average 2008 exchange rates. Cost of Revenues. Our cost of revenues for the years ended December 31, 2009 and 2008 were split among the following geographic regions (dollars in thousands): Years ended December 31, % change 2009 % 2008 % Actual Constant currency North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $269,242 144,875 69,303 56% $238,583 30% 122,658 53,558 14% 57% 13% N/A 30% 18% 13% 29% 28% 28% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $483,420 100% $414,799 100% 17% 19% Cost of revenues as a percentage of revenues: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2009 2008 50% 64% 58% 55% 54% 69% 63% 59% North America Cost of Revenues. North America cost of revenues for the years ended December 31, 2009 and 2008 included $99.3 million and $91.9 million, respectively, of depreciation expense. Growth in depreciation expense of $14.5 million was due to our IBX data center expansion activity; however, this growth was partially offset by a $7.1 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the year ended December 31, 2009. Excluding depreciation, the increase in North America cost of revenues was primarily due to overall growth related to our revenue growth and costs associated with our expansion projects, including (i) an increase of $9.8 million in rent and facility costs, (ii) an increase of $7.9 million in utility costs as a result of increased customer installations and (iii) $5.7 million in higher compensation costs, including general salaries, bonuses and headcount growth (308 North America employees as of December 31, 2009 versus 289 as of December 31, 2008). Europe Cost of Revenues. Europe cost of revenues for the years ended December 31, 2009 and 2008 included $37.1 million and $33.5 million, respectively, of depreciation expense. Growth in depreciation expense of $4.1 million was primarily due to our IBX center expansion activity; however, this growth was partially offset by a $523,000 decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the year ended December 31, 2009. In the fourth quarter of 2009, we recorded a $4.2 million decrease in depreciation expense as an out-of-period adjustment related to incorrectly depreciating certain assets. This $4.2 million out-of-period adjustment represents the correction of errors attributable to the nine months ended September 30, 2009 and the years ended December 31, 2008 and 2007, which we have concluded were not material to any previously-reported historical quarterly periods or results of operations for the nine months ended September 30, 2009 and to any previously-reported historical annual or quarterly periods for the years ended December 31, 2008 or 2007. Excluding depreciation expense, the increase in Europe cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, such as (i) an increase of $11.0 million of utility costs arising from increased customer installations and revenues attributed to customer growth and (ii) $3.4 million of higher rent and facility costs. During the year ended December 31, 2009, the U.S. dollar was generally stronger relative 47 to the British pound, Euro and Swiss franc than during the year ended December 31, 2008, resulting in approximately $12.1 million of favorable foreign currency impact to our Europe cost of revenues during the year ended December 31, 2009 when compared to average 2008 exchange rates. Asia-Pacific Cost of Revenues. Asia-Pacific cost of revenues for the years ended December 31, 2009 and 2008 included $24.4 million and $17.6 million, respectively, of depreciation expense. Growth in depreciation expense of $11.2 million was primarily due to our IBX data center expansion activity; however, this growth was partially offset by a $4.4 million decrease in depreciation expense as we revised the estimated useful lives of certain of our property, plant and equipment during the year ended December 31, 2009. Excluding depreciation expense, the increase in Asia-Pacific cost of revenues was primarily the result of costs associated with our expansion projects and overall growth in costs to support our revenue growth, including (i) $3.9 million of higher utility costs as a result of increased customer installations and (ii) $2.2 million of higher rent and facility costs. For the year ended December 31, 2009, the impact of foreign currency fluctuations to our Asia-Pacific cost of revenues was not significant when compared to average 2008 exchange rates. Sales and Marketing Expenses. Our sales and marketing expenses for the years ended December 31, 2009 and 2008 were split among the following geographic regions (dollars in thousands): Years ended December 31, % change 2009 % 2008 % Actual Constant currency North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,900 17,755 9,929 56% $38,219 28% 19,331 9,363 16% 57% 29% 14% (6%) N/A (8%) 6% 4% 6% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $63,584 100% $66,913 100% (5%) (1%) Sales and marketing expenses as a percentage of revenues: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2009 2008 7% 8% 8% 7% 9% 11% 11% 9% North America Sales and Marketing Expenses. The decrease in our North America sales and marketing expenses was primarily due to $1.6 million of higher expenditures related to our branding initiatives in 2008. Europe Sales and Marketing Expenses. The decrease in our Europe sales and marketing expenses was primarily due to $1.5 million of lower bad debt expense. During the year ended December 31, 2009, the U.S. dollar was generally stronger relative to the British pound, Euro and Swiss franc than during the year ended December 31, 2008, resulting in approximately $2.4 million of favorable foreign currency impact to our Europe sales and marketing expenses during the year ended December 31, 2009 when compared to average 2008 exchange rates. Asia-Pacific Sales and Marketing Expenses. The increase in our Asia-Pacific sales and marketing expenses was primarily due to higher compensation costs, including general salaries, bonuses and stock-based compensation expense. For the year ended December 31, 2009, the impact of foreign currency fluctuations to our Asia-Pacific sales and marketing expenses was not significant when compared to average 2008 exchange rates. 48 General and Administrative Expenses. Our general and administrative expenses for the years ended December 31, 2009 and 2008 were split among the following geographic regions (dollars in thousands): Years ended December 31, % change 2009 % 2008 % Actual Constant currency North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,141 33,240 17,943 67% $ 96,657 34,071 21% 15,836 12% 8% N/A 66% 23% (2%) 11% 13% 10% 15% Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $155,324 100% $146,564 100% 6% 9% General and administrative expenses as a percentage of revenues: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2009 2008 19% 15% 15% 18% 22% 19% 19% 21% North America General and Administrative Expenses. The increase in our North America general and administrative expenses was primarily due to $8.5 million of higher compensation costs, including general salaries, bonuses and headcount growth (298 North America general and administrative employees as of December 31, 2009 versus 259 as of December 31, 2008). Europe General and Administrative Expenses. The decrease in our Europe general and administrative expenses was primarily due to a $3.1 million one-time stock-based compensation charge due to equity award modifications related to the resignation of two senior officers in Europe during the year ended December 31, 2008, partially offset by $2.0 million of higher compensation costs, including general salaries, bonuses and headcount growth (109 Europe general and administrative employees as of December 31, 2009 versus 80 as of December 31, 2008). During the year ended December 31, 2009, the U.S. dollar was generally stronger relative to the British pound, Euro and Swiss franc than during the year ended December 31, 2008, resulting in approximately $4.1 million of favorable foreign currency impact to our Europe general and administrative expenses during the year ended December 31, 2009 when compared to average 2008 exchange rates. Asia-Pacific General and Administrative Expenses. The increase in our Asia-Pacific general and administrative expenses was primarily due to $1.2 million of higher professional fees including legal fees. For the year ended December 31, 2009, the impact of foreign currency fluctuations to our Asia-Pacific general and administrative expenses was not significant when compared to average 2008 exchange rates. Acquisition Costs. During the year ended December 31, 2009, we recorded acquisition costs totaling $5.2 million, primarily related to the Upminster acquisition and the agreement to acquire Switch and Data. During the year ended December 31, 2008, we did not expense direct acquisition costs pursuant to the accounting standard applicable to that period. Restructuring Charges. During the year ended December 31, 2009, we recorded reductions of restructuring charges totaling $6.1 million, primarily due to a reversal of a restructuring charge accrual of $5.8 million for our excess space in the Los Angeles metro area as a result of our decision to utilize this space to expand our original Los Angeles IBX data center. Our excess space lease in the New York metro area remains abandoned and continues to carry a restructuring charge. During the year ended December 31, 2008, we recorded a restructuring charge adjustment of $3.1 million from revised sublease assumptions on the two excess space leases in the Los Angeles and New York metro areas as a result of new information becoming available. We are contractually committed to the lease of excess space in the New York metro area through 2015. 49 Interest Income. Interest income decreased to $2.4 million for the year ended December 31, 2009 from $8.9 million for the year ended December 31, 2008. Interest income decreased primarily due to lower yields on invested balances. The average yield for the year ended December 31, 2009 was 0.58% versus 2.77% for the year ended December 31, 2008. Interest Expense. Interest expense was $74.2 million and $61.7 million, respectively, for the years ended December 31, 2009 and 2008. The increase in interest expense was primarily due to higher loan balances as a result of loan drawdowns and new financings entered into during 2008 and 2009 consisting of (i) our $373.8 million 4.75% convertible subordinated notes offering in June 2009, (ii) our Netherlands financing, of which $9.3 million was outstanding as of December 31, 2009 with an approximate interest rate of 4.31% per annum as compared to $6.5 million outstanding as of December 31, 2008 with an approximate interest rate of 4.18% per annum and (iii) our Singapore financing, which we obtained in September 2009, of which $24.6 million was outstanding as of December 31, 2009 with an approximate interest rate of 4.20% per annum. The increase was partially offset by higher capitalized interest expense, repayment of some loans and the partial conversions of certain of our convertible subordinated debentures in November 2008 and June 2009. During the years ended December 31, 2009 and 2008, we capitalized $12.9 million and $7.9 million, respectively, of interest expense to construction in progress. Other-Than-Temporary Impairment Loss On Investments. For the years ended December 31, 2009 and 2008, we recorded $2.6 million and $1.5 million, respectively, of other-than-temporary impairment losses on one of our money market accounts as more fully described in Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report. Other Income (Expense). For the years ended December 31, 2009 and 2008, we recorded $2.4 million and $1.3 million of other income, respectively, primarily attributable to foreign currency exchange gains during the periods. Income Taxes. For the year ended December 31, 2009, we recorded $39.6 million of income tax expense. The tax expense recorded in the year ended December 31, 2009 was primarily a result of applying the effective statutory tax rates to the operating income adjusted for permanent tax adjustments for the period, partially offset by income tax benefits due to the release of valuation allowances of $3.1 million and $5.2 million associated with our Hong Kong and U.K. operations, respectively. For the year ended December 31, 2008, we recorded $87.6 million of income tax benefits primarily due to recognition of deferred tax assets of $85.1 million and $6.1 million associated with our North America and Australian operations, respectively, partially offset by tax provisions from other jurisdictions. As of December 31, 2009, we had total net deferred tax assets of $25.2 million consisting primarily of favorable temporary differences and net operating loss carryforwards, the majority of which are attributable to our North America operations. For further information on our income taxes, refer to Note 12 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Non-GAAP Financial Measures We provide all information required in accordance with generally accepted accounting principles (GAAP), but we believe that evaluating our ongoing operating results may be difficult if limited to reviewing only GAAP financial measures. Accordingly, we use non-GAAP financial measures, primarily adjusted EBITDA, to evaluate our operations. We also use adjusted EBITDA as a metric in the determination of employees’ annual bonuses and vesting of restricted stock units that have both a service and performance condition. In presenting adjusted EBITDA, we exclude certain items that we believe are not good indicators of our current or future operating performance. These items are depreciation, amortization, accretion of asset retirement obligations and accrued restructuring charges, stock-based compensation, restructuring charges and acquisition costs. Legislative and regulatory requirements encourage the use of and emphasis on GAAP financial metrics and require companies to 50 explain why non-GAAP financial metrics are relevant to management and investors. We exclude these items in order for our lenders, investors, and industry analysts, who review and report on us, to better evaluate our operating performance and cash spending levels relative to our industry sector and competitors. For example, we exclude depreciation expense as these charges primarily relate to the initial construction costs of our IBX data centers and do not reflect our current or future cash spending levels to support our business. Our IBX data centers are long-lived assets, and have an economic life greater than 10 years. The construction costs of our IBX data 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 data centers. These estimates could vary from actual performance of the asset, are based on historical costs incurred to build out our IBX data centers, and are not indicative of current or expected future capital expenditures. Therefore, we exclude depreciation from our operating results when evaluating our operations. In addition, in presenting the non-GAAP financial measures, we exclude amortization expense related to certain intangible assets, as it represents a cost that may not recur and is not a good indicator of our current or future operating performance. We exclude accretion expense, both as it relates to asset retirement obligations as well as accrued restructuring charge liabilities, as these expenses represent costs which we believe are not meaningful in evaluating our current operations. We exclude non-cash stock-based compensation expense as it represents expense attributed to equity awards that have no current or future cash obligations. As such, we, and many investors and analysts, exclude this stock-based compensation expense when assessing the cash generating performance of our operations. We also exclude restructuring charges from our non-GAAP financial measures. The restructuring charges relate to our decisions to exit leases for excess space adjacent to several of our IBX data centers, which we did not intend to build out, or our decision to reverse such restructuring charges or severance charges related to the Switch and Data acquisition. Finally, we also exclude acquisition costs from our non-GAAP financial measures. The acquisition costs relate to costs we incur in connection with business combinations. Management believes such items as restructuring charges and acquisition costs are non-core transactions; however, these types of costs will or may occur in future periods. 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 core, ongoing business operations. We believe that the inclusion of this non-GAAP financial measure provides consistency and comparability with past reports and provides a better understanding of the overall performance of the business and its ability to perform in subsequent periods. We believe that if we 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 us 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 we use non-GAAP financial measures, we provide a reconciliation of the non-GAAP financial measure 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. 51 We define adjusted EBITDA as income or loss from operations plus depreciation, amortization, accretion, stock-based compensation expense, restructuring charges and acquisition costs as presented below (dollars in thousands): Years ended December 31, 2010 2009 2008 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation, amortization and accretion expense . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $194,711 263,564 67,489 12,337 6,734 $181,079 175,371 53,056 5,155 (6,053) $ 73,262 160,987 55,085 — 3,142 Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $544,835 $408,608 $292,476 The geographic split of our adjusted EBITDA is presented below (dollars in thousands): Years ended December 31, 2010 2009 2008 North America: Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation, amortization and accretion expense . . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,118 173,811 50,966 11,094 6,734 $128,168 106,207 40,082 4,091 (6,053) $ 66,202 101,414 40,993 — 3,142 Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $363,723 $272,495 $211,751 Europe: Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation, amortization and accretion expense . . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,929 60,291 9,397 1,065 $ 31,202 43,744 5,843 1,064 $ 1,442 41,208 8,473 — Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $105,682 $ 81,853 $ 51,123 Asia-Pacific: Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation, amortization and accretion expense . . . . . . . . . . . . . . . . . . . Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,664 29,462 7,126 178 $ 21,709 25,420 7,131 — $ 5,618 18,365 5,619 — Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,430 $ 54,260 $ 29,602 Our adjusted EBITDA results have improved each year and in each region due to the improved operating results discussed earlier in “Results of Operations”, as well as the nature of our business model consisting of a recurring revenue stream and a cost structure which has a large base that is fixed in nature that is also discussed earlier in “Overview”. We believe that our adjusted EBITDA results will continue to improve in future periods as we continue to grow our business. Liquidity and Capital Resources As of December 31, 2010, our total indebtedness was comprised of (i) convertible debt principal totaling $1.0 billion from our 2.50% convertible subordinated notes (gross of discount), our 3.00% convertible subordinated notes, and our 4.75% convertible subordinated notes (gross of discount) and (ii) non-convertible 52 debt and financing obligations totaling $1.1 billion consisting of (a) $750.0 million of principal from our senior notes, (b) $120.3 million of principal from our loans payable and (c) $261.9 million from our capital lease and other financing obligations. We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of our current portion of debt due, and to complete our publicly-announced expansion projects. As of December 31, 2010, we had $592.8 million of cash, cash equivalents and short-term and long-term investments. Besides our investment portfolio and any financing activities we may pursue, customer collections are our primary source of cash. While we believe we have a strong customer base and have continued to experience relatively strong collections, if the current market conditions were to deteriorate, some of our customers may have difficulty paying us and we may experience increased churn in our customer base, including reductions in their commitments to us, all of which could have a material adverse effect on our liquidity. As of December 31, 2010, we had a total of approximately $99.1 million of additional liquidity available to us, consisting of (i) approximately $92.4 million under the new Asia-Pacific financing and (ii) $6.7 million under the $25.0 million Bank of America revolving credit line. While we believe we have sufficient liquidity and capital resources to meet our current operating requirements and to complete our publicly-announced IBX expansion plans, we may pursue additional expansion opportunities, primarily the build-out of new IBX data centers, in certain of our existing markets which are at or near capacity within the next year, as well as potential acquisitions. While we will be able to fund these expansion plans with our existing resources, additional financing, either debt or equity, may be required to pursue certain of these additional expansion plans. However, if current market conditions were to deteriorate, we may be unable to secure additional financing or any such additional financing may only be available to us on unfavorable terms. An inability to pursue additional expansion opportunities will have a material adverse effect on our ability to maintain our desired level of revenue growth in future periods. Sources and Uses of Cash Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392,872 (600,969) 309,686 (in thousands) $ 355,492 (558,178) 323,598 $ 267,558 (478,040) 145,106 Years ended December 31, 2010 2009 2008 Operating Activities The increase in net cash provided by operating activities during 2010 compared to 2009 and 2008 was primarily due to improved operating results as discussed above, partially offset by growth in accounts receivable, higher interest paid in cash, payments related to the termination of several interest rate swaps totaling $17.3 million and restructuring charges and acquisition costs paid in connection with the Switch and Data acquisition. We expect that we will continue to generate cash from our operating activities throughout 2011 and beyond. Investing Activities The increase in net cash used in investing activities during 2010 compared to 2009 and 2008 was primarily due to higher capital expenditures as a result of expansion activity, the Switch and Data acquisition and the purchase of the Amsterdam IBX property. During the years ended December 31, 2010, 2009 and 2008, these capital expenditures were $579.4 million, $369.5 million and $447.0 million, respectively. During 2011, we expect that our IBX expansion construction activity will be similar to our 2010 spending levels. However, if the 53 opportunity to expand is greater than planned and we have sufficient funding to increase the expansion opportunities available to us, we may increase the level of capital expenditures to support this growth as well as pursue additional acquisitions or joint ventures. Financing Activities The net cash provided by financing activities for the year ended December 31, 2010 was primarily due to our $750.0 million 8.125% senior notes offering in February 2010 and approximately $63.4 million of incremental net proceeds from the new Asia-Pacific financing, which replaced our previously existing Asia- Pacific financing and Singapore financing, partially offset by repayment of our debt facilities, including the Chicago IBX financing, the European financing, the Singapore financing, the Netherlands financing and mortgage payable. Net cash provided by financing activities during the year ended December 31, 2009 was primarily the result of $373.8 million in gross proceeds from our 4.75% convertible notes offering, partially offset by payment of the associated capped call transaction. Going forward, we expect that our financing activities will consist primarily of drawdowns of our new Asia-Pacific financing offset by repayment of our debt for the foreseeable future. Depending on market conditions, we may pursue additional financings in the future. Debt Obligations—Convertible Debt 4.75% Convertible Subordinated Notes. In June 2009, we issued $373.8 million aggregate principal amount of 4.75% convertible subordinated notes due June 15, 2016. Interest is payable semi-annually on June 15 and December 15 of each year, beginning December 15, 2009. The initial conversion rate is 11.8599 shares of common stock per $1,000 principal amount of 4.75% convertible subordinated notes, subject to adjustment. This represents an initial conversion price of approximately $84.32 per share of common stock. Upon conversion, holders will receive, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. As of December 31, 2010, the 4.75% convertible subordinated notes were convertible into 4.4 million shares of our common stock. Holders of the 4.75% convertible subordinated notes may convert their notes under certain defined circumstances, including during any fiscal quarter (and only during that fiscal quarter) ending after December 31, 2009, if the sale price of our common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than 130% of the conversion price per share of common stock, which was $109.62 per share, on such last trading day or at any time on or after March 15, 2016. Upon conversion, if we elected to pay a sufficiently large portion of the conversion obligation in cash, additional consideration beyond the $373.8 million of gross proceeds received would be required. However, to minimize the impact of potential dilution upon conversion of the 4.75% convertible subordinated notes, we entered into capped call transactions, which are referred to as the capped call, separate from the issuance of the 4.75% convertible subordinated notes, for which we paid a premium of $49.7 million. The capped call covers a total of approximately 4.4 million shares of our common stock, subject to adjustment. Under the capped call, we effectively raised the conversion price of the 4.75% convertible subordinated notes from $84.32 to $114.82. Depending upon our stock price at the time the 4.75% convertible subordinated notes are converted, the capped call will return up to 1.2 million shares of our common stock to us; however, we will receive no benefit from the capped call if our stock price is $84.32 or lower at the time of conversion and will receive less shares for share prices in excess of $114.82 at the time of conversion than we would have received at a share price of $114.82 (our benefit from the capped call is capped at $114.82 and no additional benefit is received beyond this price). We do not have the right to redeem the 4.75% convertible subordinated notes at our option. We separately accounted for the liability and equity components of our 4.75% convertible subordinated notes in accordance with a FASB standard for convertible debt instruments that may be settled in cash upon 54 conversion (including partial cash settlement). See “4.75% Convertible Subordinated Notes” in Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. 3.00% Convertible Subordinated Notes. In September 2007, we issued $396.0 million aggregate principal amount of 3.00% Convertible Subordinated Notes due October 15, 2014. Interest is payable semi-annually on April 15 and October 15 of each year, and commenced in April 2008. Holders of the 3.00% convertible subordinated notes may convert their notes at their option on any day up to and including the business day immediately preceding the maturity date into shares of our common stock. The base conversion rate is 7.436 shares of common stock per $1,000 principal amount of 3.00% convertible subordinated notes, subject to adjustment. This represents a base conversion price of approximately $134.48 per share of common stock. If, at the time of conversion, the applicable stock price of our common stock exceeds the base conversion price, the conversion rate will be determined pursuant to a formula resulting in the receipt of up to 4.4616 additional shares of common stock per $1,000 principal amount of the 3.00% convertible subordinated notes, subject to adjustment. However, in no event would the total number of shares issuable upon conversion of the 3.00% convertible subordinated notes exceed 11.8976 per $1,000 principal amount of 3.00% convertible subordinated notes, subject to anti-dilution adjustments, or the equivalent of $84.05 per share of our common stock or a total of 4.7 million shares of our common stock. As of December 31, 2010, the 3.00% convertible subordinated notes were convertible into 2.9 million shares of our common stock. We do not have the right to redeem the 3.00% convertible subordinated notes at our option. 2.50% Convertible Subordinated Notes. In March 2007, we issued $250.0 million in aggregate principal amount of 2.50% convertible subordinated notes due April 2012. The interest on the 2.50% convertible subordinated notes is payable semi-annually every April 15th and October 15th, and commenced in October 2007. The initial conversion rate is 8.9259 shares of common stock per $1,000 principal amount of convertible subordinated notes, subject to adjustment. This represents an initial conversion price of approximately $112.03 per share of common stock or 2.2 million shares of our common stock. Upon conversion, holders will receive, at our election, cash, shares of our common stock or a combination of cash and shares of our common stock. We intend to repay the 2.50% convertible subordinated notes in cash, through our existing cash balances, refinancing, or a combination thereof. Holders of the 2.50% convertible subordinated notes may convert their notes under certain defined circumstances, including during any fiscal quarter (and only during that fiscal quarter) ending after June 30, 2007, if the sale price of our common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than 130% of the conversion price per share of common stock on such last trading day, which was $145.64 per share, or at any time on or after March 15, 2012. We may only redeem all or a portion of the 2.50% convertible subordinated notes at any time after April 16, 2010 for cash but only if the closing sale price of our common stock for at least 20 of the 30 consecutive trading days immediately prior to the day we give notice of redemption is greater than 130% of the applicable conversion price per share of common stock on the date of the notice, which was $145.64 per share as of December 31, 2010. The redemption price will equal 100% of the principal amount of the convertible subordinated notes, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. Upon conversion, due to the conversion formulas associated with the 2.50% convertible subordinated notes, if our stock is trading at levels exceeding 130% of the conversion price per share of common stock, and if we elect to pay any portion of the consideration in cash, additional consideration beyond the $250.0 million of gross proceeds received would be required. However, in no event would the total number of shares issuable upon conversion of the 2.50% convertible subordinated notes exceed 11.6036 per $1,000 principal amount of convertible subordinated notes, subject to anti-dilution adjustments, or the equivalent of $86.18 per share of 55 common stock or a total of 2.9 million shares of our common stock. As of December 31, 2010, the 2.50% convertible subordinated notes were convertible into 2.2 million shares of our common stock. We separately accounted for the liability and equity components of our 2.50% convertible subordinated notes in accordance with a FASB standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). See “2.50% Convertible Subordinated Notes” in Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Debt Obligations—Non-Convertible Debt Senior Notes In February 2010, we issued $750.0 million aggregate principal amount of 8.125% senior notes due March 1, 2018, which are referred to as the senior notes. Interest is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2010. The senior notes are unsecured and rank equal in right of payment to our existing or future senior debt and senior in right of payment to our existing and future subordinated debt. The senior notes will be effectively junior to any of our existing and future secured indebtedness and any indebtedness of our subsidiaries. The senior notes are governed by an indenture which contains covenants that limit our ability and the ability of our subsidiaries to, among other things: • • • incur additional debt; pay dividends or make other restricted payments; purchase, redeem or retire capital stock or subordinated debt; • make asset sales; • • • • enter into transactions with affiliates; incur liens; enter into sale-leaseback transactions; provide subsidiary guarantees; • make investments; and • merge or consolidate with any other person. At any time prior to March 1, 2013, we may on any one or more occasions redeem up to 35% of the aggregate principal amount of the senior notes outstanding at a redemption price equal to 108.125% of the principal amount of the senior notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the senior notes remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after March 1, 2014, we may redeem all or a part of the 8.125% senior notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, to, but not including, the applicable redemption date, if redeemed during the one-year period beginning on March 1 of the years indicated below: 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.0625% 102.0313% 100.0000% Redemption price of the senior notes 56 In addition, at any time prior to March 1, 2014, we may also redeem all or a part of the senior notes at a redemption price equal to 100% of the principal amount of the senior notes redeemed plus applicable premium plus accrued and unpaid interest, if any, to, but not including, the date of redemption. Upon a change in control, we will be required to make an offer to purchase each holder’s senior notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase. Capital Lease and Other Financing Obligations We have numerous capital lease and other financing obligations with maturity dates ranging from 2011 to 2030 under which a total principal balance of $261.9 million remained outstanding as of December 31, 2010 with a weighted average effective interest rate of 8.03%. For further information on our capital leases and other financing obligations, see “Capital Leases and Other Financing Obligations” in Note 8 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Loans Payable New Asia-Pacific Financing. In May 2010, our five wholly-owned subsidiaries, located in Australia, Hong Kong, Japan and Singapore, completed a new multi-currency credit facility agreement for approximately $223.6 million, which is referred to as the new Asia-Pacific financing, comprising 79.2 million Australian dollars, 370.4 million Hong Kong dollars, 99.4 million Singapore dollars and 1.5 billion Japanese yen. The new Asia- Pacific financing replaced our previously existing Asia-Pacific financing and Singapore financing. The new Asia-Pacific financing has a five-year term with semi-annual principal payments and quarterly debt service and consists of two tranches: (i) Tranche A totaling approximately $90.8 million was available for immediate drawing upon satisfaction of certain conditions precedent and was used to refinance the existing Asia-Pacific financing and Singapore financing and (ii) Tranche B totaling approximately $132.8 million is available for drawing in Australian, Hong Kong and Singapore dollars only for up to 24 months following the effective date of the new Asia-Pacific financing. The new Asia Pacific financing bears an interest rate of 3.50% above the local borrowing rates for the first 12 months and interest rates between 2.50%-3.50% above the local borrowing rates thereafter, depending on the leverage ratio within our five subsidiaries. The new Asia-Pacific financing contains four financial covenants, which we must comply with quarterly, consisting of two leverage ratios, an interest coverage ratio and a debt service ratio. The new Asia-Pacific financing is guaranteed by us and is secured by most of our five subsidiaries’ assets and share pledges. During the year ended December 31, 2010, our five subsidiaries used part of the proceeds from the partially-drawn down Tranche A and Tranche B under the New Asia-Pacific Financing for the prepayment and termination of the existing Asia-Pacific financing and the Singapore financing. As of December 31, 2010, our five subsidiaries had fully utilized Tranche A and utilized approximately $40.4 million of Tranche B under the new Asia-Pacific financing. The loans payable under the new Asia-Pacific financing have a final maturity date of March 2015. As of December 31, 2010, we were in compliance with all financial covenants in connection with the new Asia- Pacific financing. As of December 31, 2010, approximately $120.3 million was outstanding under the new Asia-Pacific financing at an approximate blended interest rate of 4.86% per annum, leaving approximately $92.4 million available for future borrowings under the new Asia-Pacific financing. $25.0 Million Bank of America Revolving Credit Line. In February 2009, we entered into a $25.0 million revolving credit facility with Bank of America, which is referred to as the $25.0 million Bank of America revolving credit line. In February 2011, we amended the $25.0 million Bank of America revolving credit line and extended the maturity date to February 2012. The $25.0 million Bank of America revolving credit line is used primarily as a letter of credit issuing facility and to fund our working capital if so needed. The effect of issuing letters of credit under the $25.0 million Bank of America revolving credit line reduces the amount available for borrowing under the $25.0 million Bank of America revolving credit line. We may borrow, repay and reborrow under the $25.0 million Bank of America revolving credit line at either the prime rate or at a borrowing margin of 2.75% over one, three or six month LIBOR, subject to a minimum borrowing cost of 57 3.00%. The $25.0 million Bank of America revolving credit line contains three financial covenants, which we must comply with quarterly, consisting of a tangible net worth ratio, a debt service ratio and a senior leverage ratio and is unsecured. As of December 31, 2010, we were in compliance with all financial covenants in connection with the $25.0 million Bank of America revolving credit line. The $25.0 million Bank of America revolving credit line has a one-year term and is renewed annually subject to mutual agreement by both parties. As of December 31, 2010, we had issued 13 irrevocable letters of credit totaling $18.3 million under the $25.0 million Bank of America revolving credit line. As a result, the amount available to borrow was $6.7 million as of December 31, 2010. Contractual Obligations and Off-Balance-Sheet Arrangements We lease a majority of our IBX data centers and certain equipment under non-cancelable lease agreements expiring through 2035. The following represents our contractual obligations as of December 31, 2010 (in thousands): 2011 2012 2013 2014 2015 2016 and thereafter Total Convertible debt (1) . . . . . . . . . . . . . . . $ — $250,000 $ — Senior notes (1) . . . . . . . . . . . . . . . . . . New Asia-Pacific financing (1) . . . . . . 19,978 Interest (2) . . . . . . . . . . . . . . . . . . . . . . 101,557 Capital lease and other financing — 24,827 97,376 — 31,493 92,940 $395,986 $ — $ 373,750 $1,019,736 750,000 120,315 621,258 750,000 — 161,390 — 15,043 78,791 — 28,974 89,204 obligations (3) . . . . . . . . . . . . . . . . . 27,959 28,435 28,948 29,660 30,431 237,711 383,144 Operating leases under accrued restructuring charges (4) . . . . . . . . . 2,459 Operating leases (5) . . . . . . . . . . . . . . . 112,126 116,749 117,158 112,112 83 Other contractual commitments (6) . . . 240,040 1,394 445 Asset retirement obligations (7) . . . . . . 75,391 — 2,044 962 2,463 2,429 2,444 1,444 94,493 — 5,437 — 11,239 538,357 1,090,995 317,558 46,767 — 38,529 $504,568 $595,207 $275,989 $659,872 $225,639 $2,099,737 $4,361,012 (1) Represents principal only. (2) Represents interest on convertible debt, senior notes and new Asia-Pacific financing based on their approximate interest rates as of December 31, 2010. (3) Represents principal and interest. (4) Excludes any subrental income. (5) Represents minimum operating lease payments, excluding potential lease renewals. (6) Represents off-balance sheet arrangements. Other contractual commitments are described below. (7) Represents liability, net of future accretion expense. We entered into 13 irrevocable letters of credit totaling $18.3 million with Bank of America. These letters of credit were provided in lieu of cash deposits under the $25.0 million Bank of America revolving credit line and automatically renew in successive one-year periods until the final lease expiration date or termination of a utility agreement. If the landlords for these IBX leases or utility provider decides to draw down on these letters of credit triggered by an event of default under the agreement, we will be required to fund these letters of credit either through cash collateral or borrowing under the $25.0 million Bank of America revolving credit line. These contingent commitments are not reflected in the table above. Primarily as a result of our various IBX expansion projects, as of December 31, 2010, we were contractually committed for $199.4 million of unaccrued capital expenditures, primarily for IBX equipment not yet delivered and labor not yet provided in connection with the work necessary to complete construction and open these IBX data centers prior to making them available to customers for installation. This amount, which is expected to be paid during 2011 and thereafter, is reflected in the table above as “other contractual commitments.” 58 We had other non-capital purchase commitments in place as of December 31, 2010, such as commitments to purchase power in select locations and other open purchase orders, which contractually bind us for goods or services to be delivered or provided during 2011 and beyond. Such other purchase commitments as of December 31, 2010, which total $118.2 million, are also reflected in the table above as “other contractual commitments.” In addition, although we are not contractually obligated to do so, we expect to incur additional capital expenditures of approximately $200.0 million to $250.0 million, in addition to the $199.4 million in contractual commitments discussed above as of December 31, 2010, in our various IBX expansion projects during 2011 and thereafter in order to complete the work needed to open these IBX data centers. These non-contractual capital expenditures are not reflected in the table above. If we so choose, whether due to economic factors or other considerations, we could delay these non-contractual capital expenditure commitments to preserve liquidity. Other Off-Balance-Sheet Arrangements We have various guarantor arrangements with both our directors and officers and third parties, including customers, vendors and business partners (see “Guarantor Arrangements” in Note 13 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K). As of December 31, 2010, there were no significant liabilities recorded for these arrangements. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of our financial statements requires management to make estimates and assumptions about future events that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with GAAP. Management bases its assumptions, estimates and judgments on historical experience, current trends and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. However, because future events and their effects cannot be determined with certainty, actual results may differ from these assumptions and estimates, and such differences could be material. Our significant accounting policies are discussed in Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. Management believes that the following critical accounting policies and estimates, among others, are the most critical to aid in fully understanding and evaluating our consolidated financial statements, and they require significant judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain: • Accounting for income taxes; • Accounting for business combinations; • Accounting for impairment of goodwill; and • Accounting for property, plant and equipment. 59 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Accounting for Income Taxes. Deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid. The accounting standard for income taxes requires a reduction of the carrying amounts of deferred tax assets by recording a valuation allowance if, based on the available evidence, it is more likely than not (defined by the accounting standard as a likelihood of more than 50 percent) such assets will not be realized. The valuation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns. Our accounting for deferred tax consequences represents our best estimate of those future events. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available evidence, it is more likely than not the deferred tax assets will not be realized, we record a valuation allowance. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence, including the following: 1) the nature, frequency and severity of current and cumulative financial reporting losses, 2) sources of future taxable income and 3) tax planning strategies. As of December 31, 2010 and 2009, we had total net deferred tax liabilities of $49.1 million and net deferred tax assets of $25.2 million, respectively. As of December 31, 2010 and 2009, we had a total valuation allowance of $42.0 million and $34.4 million, respectively. During the year ended December 31, 2010, we decided to release our valuation allowance associated with one entity each in Germany and Singapore, which resulted in an income tax benefit of $5.2 million and $2.1 million, respectively, in our results of operations. During the year ended December 31, 2009, we decided to release our valuation allowance associated with our Hong Kong operations and one entity in U.K. operations, which resulted in an income tax benefit of $3.1 million and $5.2 million, respectively, in our results of operations. Our decisions to release our valuation allowances were based on our belief that the operations of these regions had achieved a sufficient level of profitability and will sustain a sufficient level of profitability in the future to support the release of these valuation allowances based on relevant facts and circumstances. However, if our assumptions on the future performance of these jurisdictions prove not to be correct and these jurisdictions are not able to sustain a sufficient level of profitability to support the associated deferred tax assets on our consolidated balance sheet, we will have to impair our deferred tax assets through an additional valuation allowance, which would impact our financial position and results of operations in the period such a determination is made. 60 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Our remaining valuation allowances as of December 31, 2010, totaling $42.0 million, primarily relates to certain of our subsidiaries outside of North America. If and when we release our remaining valuation allowances, it will have an impact to our financial position and results of operations in the periods such determinations are made. We will continue to assess the need for our valuation allowances, by country or location, in the future. Accounting for Business Combinations In accordance with the accounting guidance for business combinations, we allocate the purchase price of an acquired business to its identifiable assets and liabilities based on estimated fair values. The excess of the purchase price over the fair value of the assets acquired and liabilities assumed, if any, is recorded as goodwill. We use all available information to estimate fair values. We typically engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets such as customer contracts, leases and any other significant assets or liabilities. We adjust the preliminary purchase price allocation, as necessary, up to one year after the acquisition closing date if we obtain more information regarding asset valuations and liabilities assumed. Our purchase price allocation methodology contains uncertainties because it requires assumptions and management’s judgment to estimate the fair value of assets acquired and liabilities assumed at the acquisition date. Management estimates the fair value of assets and liabilities based upon quoted market prices, the carrying value of the acquired assets and widely accepted valuation techniques, including discounted cash flows and market multiple analyses. Our estimates are inherently uncertain and subject to refinement. Unanticipated events or circumstances may occur which could affect the accuracy of our fair value estimates, including assumptions regarding industry economic factors and business strategies. During the last three years, we have completed several business combinations, the most significant of which was the Switch and Data acquisition for a purchase price of $700.0 million in April 2010. Subsequent to the acquisition, we adjusted the purchase price allocation due to changes in estimates and assumptions; however, in the aggregate, these adjustments had an insignificant impact to our financial statements as of and for the eight months ended December 31, 2010. As fully described in Note 2 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, the purchase price allocation for the Switch and Data acquisition was completed in the fourth quarter of 2010. 61 Description Judgments and Uncertainties Accounting for Impairment of Goodwill In accordance with the accounting standard for goodwill and other intangible assets, we perform goodwill impairment reviews annually, or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. During the year ended December 31, 2010, we completed annual goodwill impairment reviews of the North America reporting unit, the Europe reporting unit and the Asia-Pacific reporting unit and concluded that there was no impairment as the fair value of these reporting units exceeded their carrying value. We use both the income and market approach in step one of our goodwill impairment reviews and weight the results of both equally. Under the income approach, we develop a five-year cash flow forecast and use our weighted- average cost of capital applicable to our reporting units as discount rates. This requires assumptions and estimates derived from a review of our actual and forecasted operating results, approved business plans, future economic conditions and other market data. These assumptions require significant management judgment and are inherently subject to uncertainties. Effect if Actual Results Differ From Assumptions We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we used to complete the purchase price allocation and the fair value of assets acquired and liabilities assumed. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material, which would be recorded in our statements of operations commencing in 2011. Future events, changing market conditions and any changes in key assumptions may result in an impairment charge. While we have never recorded an impairment charge against our goodwill to date, the development of adverse business conditions in our North America, European or Asia-Pacific reporting units, such as higher than anticipated customer churn or significantly increased operating costs, or significant deterioration of our market comparables that we use in the market approach, could result in an impairment charge in future periods. As of December 31, 2010, goodwill attributable to the North America reporting unit, the Europe reporting unit and the Asia-Pacific reporting unit was $408.7 million, $345.5 million and $20.1 million, respectively. Any potential impairment charge against our goodwill would not exceed the amounts recorded on our consolidated balance sheets. 62 Description Judgments and Uncertainties Effect if Actual Results Differ From Assumptions Accounting for Property, Plant and Equipment We have a substantial amount of property, plant and equipment recorded on our consolidated balance sheet. The vast majority of our property, plant and equipment represent the costs incurred to build out or acquire our IBX data centers around the world. Our IBX data centers are long-lived assets. The majority of our IBX data centers are in properties that are leased. We depreciate our property, plant and equipment using the straight-line method over the estimated useful lives of the respective assets (subject to the term of the lease in the case of leased assets or leasehold improvements). Accounting for property, plant and equipment involves a number of accounting issues including determining the appropriate period in which to depreciate such assets, making assessments for leased properties to determine whether they are capital or operating leases, capitalizing interest during periods of construction and assessing the asset retirement obligations required for certain leased properties that require us to return the leased properties back to their original condition at the time we decide to exit a leased property. While there are numerous judgments and uncertainties involved in accounting for property, plant and equipment that are significant, arriving at the estimated useful life of an asset requires the most critical judgment for us and changes to these estimates would have the most significant impact to our financial position and results of operations. When we lease a property for our IBX data centers, we generally enter into long-term arrangements with initial lease terms of at least 8-10 years and with renewal options generally available to us. During the next several years, a number of leases for our IBX data centers will come up for renewal. As we start approaching the ends of these initial lease terms, we will need to reassess the estimated useful lives of our property, plant and equipment. In addition, we may find that our estimates for the useful lives of non-leased assets may also need to be revised periodically. In many cases, we arrived at these estimates during 1999 when we opened our first three IBX data centers. We reassessed the estimated useful lives of certain of our property, plant and equipment during the third quarter of 2009 and we expect we will continue to periodically review such estimates and further changes in the future are possible. During the third quarter of 2009, we revised the estimated useful lives of certain of our property, plant and equipment. As a result, we recorded $12.0 million of lower depreciation expense for the year ended December 31, 2009 due to extending the estimated useful lives of certain of our property, plant and equipment. We undertook this review due to our determination that we were generally using certain of our existing assets longer than originally anticipated and, therefore, the estimated useful lives of certain of our property, plant and equipment has been lengthened. This change was accounted for as a change in accounting estimate on a prospective basis effective July 1, 2009 under the accounting standard for change in accounting estimates. In addition, in the fourth quarter of 2009, we recorded a $4.2 million decrease in depreciation expense as an out-of-period adjustment related to incorrectly depreciating certain assets. This $4.2 million out-of-period adjustment represents the correction of errors attributable to the nine months ended September 30, 2009 and the years ended December 31, 2008 and 2007, which we have concluded were not material to any previously-reported historical quarterly periods or results of operations for the nine months ended September 30, 2009 and to any previously-reported historical annual or quarterly periods for the years ended December 31, 2008 or 2007. 63 Description Effect if Actual Results Differ From Assumptions As of December 31, 2010 and 2009, we had property, plant and equipment of $2.7 billion and $1.8 billion, respectively, and for the years ended December 31, 2010, 2009 and 2008, we recorded depreciation expense of $246.5 million, $168.0 million and $152.4 million, respectively. Further changes in our estimated useful lives of our property, plant and equipment could have a significant impact to our results of operations. Judgments and Uncertainties Another area of judgment for us in connection with our property, plant and equipment is related to lease accounting. Most of our IBX data centers are leased. Each time we enter into a new lease or lease amendment for one of our IBX data centers, we analyze each lease or lease amendment for the proper accounting. This requires certain judgments on our part such as establishing the initial lease term to include in a lease test, establishing the remaining estimated useful life of the underlying property or equipment and estimating the fair value of the underlying property or equipment. All of these judgments are inherently uncertain. Different assumptions or estimates could result in a different accounting treatment for a lease. Recent Accounting Pronouncements See “Recent Accounting Pronouncements” in Note 1 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The following discussion about market risk involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. We may be exposed to market risks related to impairments of our investment portfolio, changes in interest rates and foreign currency exchange rates and fluctuations in the prices of certain commodities, primarily electricity. We currently employ foreign currency forward exchange contracts for the purpose of hedging certain specifically-identified exposures. The use of these financial instruments is intended to mitigate some of the risks associated with fluctuations in currency exchange rates, but does not eliminate such risks. We do not use financial instruments for trading or speculative purposes. Investment Portfolio Risk All of our marketable securities are designated as available-for-sale and are therefore recorded at fair value on our consolidated balance sheets with the unrealized gains or losses reported as a separate component of other comprehensive income or loss. We consider various factors in determining whether we should recognize an impairment charge for our securities, including the length of time and extent to which the fair value has been less than our cost basis and our intent and ability to hold the investment for a period of time sufficient to allow for 64 any anticipated recovery. As more fully described in Note 4 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K, during the years ended December 31, 2009 and 2008, we incurred an other-than-temporary impairment loss of $2.6 million and $1.5 million, respectively, from our investment portfolio (consisting of a single money market account), of which $3.6 million was recovered during the year ended December 31, 2010. If market conditions continue to deteriorate and liquidity constraints become even more pronounced, we could sustain more losses from our investment portfolio. As our securities mature, we have been increasing our holdings in U.S. government securities, such as Treasury bills and Treasury notes of a short- term duration and lower yield. As a result, we expect our interest income to remain low in the forseeable future. As of December 31, 2010, our investment portfolio of cash equivalents and marketable securities consisted of money market fund investments, corporate bonds, asset backed securities and U.S government and agency obligations. Excluding the U.S. government holdings which carry a lower risk and lower return in comparison to other securities in the portfolio, the remaining amount in our investment portfolio that could be more susceptible to market risk totaled $200.9 million. Interest Rate Risk Our exposure to market risk resulting from changes in interest rates relates primarily to our investment portfolio and a variable-rate financing in the Asia-Pacific region. The fair value of our marketable securities could be adversely impacted due to a rise in interest rates, but we do not believe such impact would be material. Securities with longer maturities are subject to a greater interest rate risk than those with shorter maturities and as of December 31, 2010 the average duration of our portfolio was less than three months. If current interest rates were to increase or decrease by 10% from their position as of December 31, 2010, the fair value of our investment portfolio could increase or decrease by approximately $14,000. An immediate 10% increase or decrease in current interest rates from their position as of December 31, 2010 would not have a material impact on our debt obligations due to the fixed nature of the majority of our debt obligations. However, the interest expense associated with our new Asia-Pacific financing, which bears interest at variable rates tied to local cost of funds, could be affected. For every 100 basis point change in interest rates, our annual interest expense could increase or decrease by a total of approximately $1.0 million based on the total balance of our borrowings under the new Asia-Pacific financing as of December 31, 2010. As of December 31, 2010, we had no outstanding interest rate swaps. 65 The fair value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. These interest rate changes may affect the fair value of the fixed interest rate debt but do not impact our earnings or cash flows. The fair value of the Company’s convertible debt, which is traded in the market, is based on quoted market prices. The fair value of the Company’s mortgage and loans payable, which are not traded in the market, is estimated by considering the Company’s credit rating, current rates available to the Company for debt of the same remaining maturities and the terms of the debt. The following represents the estimated fair value of our mortgage and loans payable, senior notes and convertible debt and as of (in thousands): December 31, 2010 December 31, 2009 Carrying Value Fair Value Carrying Value Fair Value Mortgage and Loans Payable: New Asia-Pacific financing . . . . . . . . . . . . . . . . . . . . . . . . . . European financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chicago IBX financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,315 — — — — — — $126,958 — — — — — — $ — $ — 111,375 130,058 109,700 109,991 83,406 91,756 60,827 64,559 21,739 24,559 7,941 9,311 $120,315 $126,958 $430,234 $394,988 Senior Notes: Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750,000 $816,270 $ — $ — Convertible Debt: 2.50% convertible subordinated notes (1) . . . . . . . . . . . . . . . . 3.00% convertible subordinated notes . . . . . . . . . . . . . . . . . . 4.75% convertible subordinated notes (2) . . . . . . . . . . . . . . . . $234,185 395,986 286,166 $246,280 399,946 348,786 $222,943 395,986 274,777 $228,935 461,324 307,248 $916,337 $995,012 $893,706 $997,507 (1) Total debt principal is $250.0 million, which is subject to a FASB standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. (2) Total debt principal is $373.8 million, which is subject to a FASB standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). See Note 7 of Notes to Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. We may enter into interest rate hedging agreements in the future to mitigate our exposure to interest rate risk. Foreign Currency Risk The majority of our revenue is denominated in U.S. dollars, generated mostly from customers in the U.S. However, approximately 38% of both our revenues and operating costs are attributable to Canada and the Europe and Asia-Pacific regions and a large portion of those revenues and costs are denominated in a currency other than the U.S. dollar, primarily the British pound, Canadian dollar, Euro, Swiss franc, Singapore dollar, Japanese yen, Hong Kong dollar and Australian dollar. As a result, our operating results and cash flows are impacted by currency fluctuations relative to the U.S. dollar. To protect against certain reductions in value caused by changes in currency exchange rates, we have established a risk management program to offset some of the risk of carrying assets and liabilities denominated in foreign currencies. As a result, we enter into foreign currency forward contracts to manage the risk associated with certain foreign currency-denominated assets and liabilities. Our risk management program reduces, but does not entirely eliminate, the impact of currency exchange rate movements and its impact on the consolidated statements of operations. As of December 31, 2010, the outstanding foreign currency forward contracts had maturities of less than one year. 66 For the foreseeable future, we anticipate that approximately 35-45% of our revenues and operating costs will continue to be generated and incurred outside of the U.S. in currencies other than the U.S. dollar. While we hedge certain of our balance sheet foreign currency assets and liabilities, we do not hedge revenue. During the second half of 2008 and through the first quarter of 2009, the U.S. dollar strengthened relative to certain of the currencies of the foreign countries in which we operate. This significantly impacted our consolidated financial position and results of operations as amounts in foreign currencies translated into less U.S. dollars. However, during the second half of 2009 and fiscal 2010, the U.S. dollar has been generally weaker relative to certain of the currencies of the foreign countries in which we operate. This overall weakness of the U.S. dollar had a positive impact on our consolidated results of operations because the foreign denominations translated into more U.S. dollars. In future periods, the volatility of the U.S. dollar as compared to the other currencies in which we do business could have a significant impact on our consolidated financial position and results of operations including the amount of revenue that we report in future periods. We may enter into additional hedging activities in the future to mitigate our exposure to foreign currency risk as our exposure to foreign currency risk continues to increase due to our growing foreign operations; however, we do not currently intend to eliminate all foreign currency transaction exposure. Commodity Price Risk Certain operating costs incurred by us are subject to price fluctuations caused by the volatility of underlying commodity prices. The commodities most likely to have an impact on our results of operations in the event of price changes are electricity, supplies and equipment used in our IBX data centers. We closely monitor the cost of electricity at all of our locations. We have entered into several power contracts to purchase power at fixed prices during 2011 and beyond in certain locations in the U.S., Australia, France, Germany, Japan, Netherlands, Singapore and the United Kingdom. In addition, as we are building new, or expanding existing, IBX data centers, we are subject to commodity price risk for building materials related to the construction of these IBX data centers, such as steel and copper. In addition, the lead-time to procure certain pieces of equipment, such as generators, is substantial. Any delays in procuring the necessary pieces of equipment for the construction of our IBX data centers could delay the anticipated openings of these new IBX data centers and, as a result, increase the cost of these projects. We do not currently employ forward contracts or other financial instruments to address commodity price risk other than the power contracts discussed above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data required by this Item 8 are listed in Item 15(a)(1) and begin at page F-1 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There is no disclosure to report pursuant to Item 9. ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K. 67 Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010. There were no significant changes in internal control over financial reporting during the quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein on page F-1 of this Annual Report on Form 10-K. Limitations on the Effectiveness of Controls Our management, including our Chief Executive Officer and Chief Financial Officer, believes that our disclosure controls and procedures and internal control over financial reporting are designed and operated to be effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected. Changes in Internal Control Over Financial Reporting There has been no change in our internal controls over financial reporting during the fourth quarter of fiscal 2010 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. ITEM 9B. OTHER INFORMATION There is no disclosure to report pursuant to Item 9B. 68 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information required by this item is incorporated by reference to the Equinix proxy statement for the 2011 Annual Meeting of Stockholders. We have adopted a Code of Ethics applicable for the Chief Executive Officer and Senior Financial Officers and a Code of Business Conduct. This information is incorporated by reference to the Equinix proxy statement for the 2011 Annual Meeting of Stockholders and is also available on our website, www.equinix.com. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference to the Equinix proxy statement for the 2011 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference to the Equinix proxy statement for the 2011 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information required by this item is incorporated by reference to the Equinix proxy statement for the 2011 Annual Meeting of Stockholders. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information required by this item is incorporated by reference to the Equinix proxy statement for the 2011 Annual Meeting of Stockholders. 69 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) Financial Statements: PART IV Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) . . . . Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements. F-1 F-2 F-3 F-4 F-5 F-6 (a)(2) All schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. (a)(3) Exhibits: Exhibit Number Exhibit Description 2.1 2.2 2.3 Combination Agreement, dated as of October 2, 2002, by and among Equinix, Inc., Eagle Panther Acquisition Corp., Eagle Jaguar Acquisition Corp., i-STT Pte Ltd, STT Communications Ltd., Pihana Pacific, Inc. and Jane Dietze, as representative of the stockholders of Pihana Pacific, Inc. Agreement and Plan of Merger dated October 21, 2009, by and among Equinix, Inc., Switch & Data Facilities Company, Inc. and Sundance Acquisition Corporation. First Amendment to the Agreement and Plan of Merger dated March 20, 2010, by and among Equinix, Inc., Switch & Data Facilities Company, Inc. and Sundance Acquisition Corporation. Incorporated by Reference Form Filing Date/ Period End Date Exhibit Filed Herewith Def. Proxy 14A 12/12/02 8-K 10/22/09 2.1 8-K 3/22/10 2.1 3.1 Amended and Restated Certificate of Incorporation 10-K/A 12/31/02 of the Registrant, as amended to date. 3.2 Certificate of Designation of Series A and Series 10-K/A 12/31/02 A-1 Convertible Preferred Stock. Amended and Restated Bylaws of the Registrant. 8-K 12/22/08 Reference is made to Exhibits 3.1, 3.2 and 3.3. 3.1 3.3 3.2 Indenture dated March 30, 2007 by and between 8-K 3/30/07 4.4 3.3 4.1 4.2 Equinix, Inc. and U.S. Bank National Association, as trustee. 4.3 Form of 2.50% Convertible Subordinated Note Due 2012 (see Exhibit 4.2). 70 Exhibit Number Exhibit Description Incorporated by Reference Form Filing Date/ Period End Date Exhibit Filed Herewith 4.4 Indenture dated September 26, 2007 by and 8-K 9/26/07 4.4 between Equinix, Inc. and U.S. Bank National Association, as trustee. 4.5 Form of 3.00% Convertible Subordinated Note Due 2014 (see Exhibit 4.4). 4.6 Indenture dated June 12, 2009 by and between 8-K 6/12/09 4.1 Equinix, Inc. and U.S. Bank National Association, as trustee. 4.7 Form of 4.75% Convertible Subordinated Note Due 2016 (see Exhibit 4.6). 4.8 Indenture dated March 3, 2010 by and between 10-Q 3/31/10 4.8 Equinix, Inc. and U.S. Bank National Association, as trustee. 4.9 Form of 8.125% Senior Note Due 2018 (see Exhibit 4.8). 10.1 Form of Indemnification Agreement between the Registrant and each of its officers and directors. S-4 (File No. 333-93749) 12/29/99 10.5 10.2 10.3 10.4 10.5 10.6 2000 Equity Incentive Plan, as amended. 2000 Director Option Plan, as amended. 2001 Supplemental Stock Plan, as amended. 10-K 10-K 10-K Equinix, Inc. 2004 Employee Stock Purchase Plan, as amended. S-8 (File No. 333-165033) 12/31/07 12/31/07 12/31/07 2/23/10 10.3 10.4 10.5 99.3 Form of Restricted Stock Agreements for Stephen M. Smith under the Equinix, Inc. 2000 Equity Incentive Plan. 10-Q 3/31/07 10.45 10.7 Letter Agreement, dated April 22, 2008, by and 10-Q 6/30/08 10.34 10.8 10.9 between Eric Schwartz and Equinix Operating Co., Inc. Severance Agreement by and between Stephen Smith and Equinix, Inc. dated December 18, 2008. Severance Agreement by and between Peter Van Camp and Equinix, Inc. dated December 10, 2008. 10-K 12/31/08 10.31 10-K 12/31/08 10.32 10.10 Severance Agreement by and between Keith 10-K 12/31/08 10.33 Taylor and Equinix, Inc. dated December 19, 2008. 10.11 Severance Agreement by and between Peter Ferris and Equinix, Inc. dated December 17, 2008. 10-K 12/31/08 10.34 71 Exhibit Number Exhibit Description 10.12 Change in Control Severance Agreement by and between Eric Schwartz and Equinix, Inc. dated December 19, 2008. Incorporated by Reference Form Filing Date/ Period End Date Exhibit Filed Herewith 10-K 12/31/08 10.35 10.13 Change in Control Severance Agreement by and 10-K 12/31/08 10.36 between Jarrett Appleby and Equinix, Inc. dated December 11, 2008. 10.14 Offer Letter from Equinix, Inc. to Jarrett Appleby 10-K 12/31/08 10.37 dated November 6, 2008. 10.15 Restricted Stock Unit Agreement for Jarrett 10-K 12/31/08 10.38 Appleby under the Equinix, Inc. 2000 Equity Incentive Plan. 10.16 Form of Restricted Stock Unit Agreement for CEO 10-Q 3/31/09 10.39 and CFO. 10.17 Form of Restricted Stock Unit Agreement for all 10-Q 3/31/09 10.40 other executive officers. 10.18 Confirmation for Base Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and Deutsche Bank AG, London Branch. 10.19 Confirmation for Additional Capped Call 8-K 8-K Transaction dated as of June 9, 2009 between Equinix, Inc. and Deutsche Bank AG, London Branch. 6/12/09 10.1 6/12/09 10.2 10.20 Master Terms and Conditions for Capped Call 8-K 6/12/09 10.3 Transactions dated as of June 9, 2009 between Equinix, Inc. and Deutsche Bank AG, London Branch. 10.21 Confirmation for Base Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and JPMorgan Chase Bank, National Association, London Branch. 8-K 6/12/09 10.4 10.22 Confirmation for Additional Capped Call 8-K 6/12/09 10.5 Transaction dated as of June 9, 2009 between Equinix, Inc. and JPMorgan Chase Bank, National Association, London Branch. 10.23 Master Terms and Conditions for Capped Call 8-K 6/12/09 10.6 Transactions dated as of June 9, 2009 between Equinix, Inc. and JPMorgan Chase Bank, National Association, London Branch. 10.24 Confirmation for Base Capped Call Transaction dated as of June 9, 2009 between Equinix, Inc. and Goldman, Sachs & Co. 72 8-K 6/12/09 10.7 Exhibit Number Exhibit Description Incorporated by Reference Form Filing Date/ Period End Date Exhibit Filed Herewith 10.25 Confirmation for Additional Capped Call 8-K 6/12/09 10.8 Transaction dated as of June 9, 2009 between Equinix, Inc. and Goldman, Sachs & Co. 10.26 Master Terms and Conditions for Capped Call 8-K 6/12/09 10.9 Transactions dated as of June 9, 2009 between Equinix, Inc. and Goldman, Sachs & Co. 10.27 Addendum to international assignment letter 10-Q 3/31/10 10.42 agreement by and between Eric Schwartz and Equinix Operating Co., Inc., dated February 17, 2010. 10.28 Switch & Data 2007 Stock Incentive Plan. 2/5/07 10.9 S-1/A (File No. 333-137607) filed by Switch & Data Facilities Company, Inc. 10.29 Amendment and Restatement of Facility 10-Q 6/30/10 10.39 Agreement, by and among Equinix Australia Pty Ltd., Equinix Hong Kong Limited, Equinix Singapore Pte. Ltd., Equinix Pacific Pte. Ltd and Equinix Japan K.K., as borrowers, the Joint Mandated Lead Arrangers, the Joint Mandated Bookrunners, the Lead Arrangers and the Closing Date Lenders, as defined therein, and The Royal Bank of Scotland N.V., as Facility Agent, dated May 10, 2010. 10.30 Offer Letter from Equinix, Inc. to Charles Meyers 10-Q dated September 28, 2010. 10.31 Restricted Stock Unit Agreement for Charles 10-Q 9/30/10 9/30/10 Meyers under the Equinix, Inc. 2000 Equity Incentive Plan. 10.32 Change in Control Severance Agreement by and 10-Q 9/30/10 between Charles Meyers and Equinix, Inc. dated September 30. 2010. 10.33 Form of amendment to existing severance agreement between the Registrant and each of Messrs. Appleby, Ferris, Meyers, Smith, Taylor and Van Camp. 10.34 Letter amendment, dated December 14, 2010, to Change in Control Severance Agreement, dated December 18, 2008, and letter agreement relating to expatriate benefits, dated April 22, 2008, as amended, by and between the Registrant and Eric Schwartz. 73 X X Exhibit Number Exhibit Description Incorporated by Reference Form Filing Date/ Period End Date Exhibit Filed Herewith 18.1 Preferable Accounting Principles Letter from 10-Q 6/30/10 18.1 X X X X X X X Pricewaterhouse Coopers LLP, Independent Registered Public Accounting Firm, dated July 26, 2010. 21.1 23.1 Subsidiaries of Equinix, Inc. Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. 31.1 Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009, (ii) Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008, (iii) Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text. (b) Exhibits. See (a) (3) above. (c) Financial Statement Schedule. See (a) (2) above. 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. EQUINIX, INC. (Registrant) February 25, 2011 By /S/ STEPHEN M. SMITH Stephen M. Smith President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Stephen M. Smith or Keith D. Taylor, or either of them, each with the power of substitution, their attorney-in-fact, to sign any amendments to this Annual Report on Form 10-K (including post-effective amendments), and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or their substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/ STEPHEN M. SMITH Stephen M. Smith /S/ KEITH D. TAYLOR Keith D. Taylor President and Chief Executive Officer (Principal Executive Officer) February 25, 2011 Chief Financial Officer (Principal February 25, 2011 Financial and Accounting Officer) /S/ PETER F. VAN CAMP Executive Chair February 25, 2011 Peter F. Van Camp /S/ STEVEN T. CLONTZ Director February 25, 2011 Steven T. Clontz /S/ GARY F. HROMADKO Director February 25, 2011 Gary F. Hromadko /S/ SCOTT G. KRIENS Scott G. Kriens /S/ WILLIAM LUBY William Luby /S/ IRVING F. LYONS, III Irving F. Lyons, III Director Director Director February 25, 2011 February 25, 2011 February 25, 2011 /S/ CHRISTOPHER B. PAISLEY Director February 25, 2011 Christopher B. Paisley 75 Exhibit Number Description of Document INDEX TO EXHIBITS 10.33 Form of amendment to existing severance agreement between the Registrant and each of Messrs. Appleby, Ferris, Meyers, Smith, Taylor and Van Camp. 10.34 Letter amendment, dated December 14, 2010, to Change in Control Severance Agreement, dated December 18, 2008, and letter agreement relating to expatriate benefits, dated April 22, 2008, as amended, by and between the Registrant and Eric Schwartz. 21.1 23.1 31.1 31.2 32.1 32.2 Subsidiaries of Equinix, Inc. Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm. Chief Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Chief Financial Officer Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Chief Executive Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Chief Financial Officer Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101 Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets as of December 31, 2010 and December 31, 2009, (ii) Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008, (iii) Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) for the years ended December 31, 2010, 2009 and 2008 (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008 and (iv) Notes to Consolidated Financial Statements, tagged as blocks of text. 76 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Equinix, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity and other comprehensive income (loss), and of cash flows present fairly, in all material respects, the financial position of Equinix, Inc. (the “Company”) and its subsidiaries at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP San Jose, CA February 25, 2011 F-1 EQUINIX, INC. Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2010 2009 Current assets: Assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net of allowance for doubtful accounts of $3,808 and $1,720 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 442,841 147,192 $ 346,056 248,508 116,358 38,696 32,961 778,048 2,806 2,650,953 774,365 150,945 16,955 73,937 64,767 46,822 21,734 727,887 9,803 1,808,115 381,050 51,015 5,171 55,109 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,448,009 $3,038,150 Current liabilities: Liabilities and Stockholders’ Equity Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued property, plant and equipment Current portion of capital lease and other financing obligations . . . . . . . . . . . . . . Current portion of mortgage and loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 145,854 91,667 7,988 19,978 52,628 $ Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital lease and other financing obligations, less current portion . . . . . . . . . . . . . . . . Mortgage and loans payable, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318,115 253,945 100,337 916,337 750,000 103,717 125,043 99,053 109,876 6,452 58,912 41,166 315,459 154,577 371,322 893,706 — 25,937 94,666 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,567,494 1,855,667 Commitments and contingencies (Note 13) Stockholders’ equity: Preferred stock, $0.001 par value per share; 100,000,000 shares authorized in 2010 and 2009; zero shares issued and outstanding in 2010 and 2009 . . . . . . . . — — Common stock, $0.001 par value per share; 300,000,000 shares authorized in 2010 and 2009; 46,166,689 and 39,315,250 shares issued and outstanding in 2010 and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated deficit 46 2,341,586 (112,018) (349,099) 39 1,665,662 (97,238) (385,980) Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880,515 1,182,483 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,448,009 $3,038,150 See accompanying notes to consolidated financial statements. F-2 EQUINIX, INC. Consolidated Statements of Operations (in thousands, except per share data) Years ended December 31, 2010 2009 2008 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,220,334 $882,509 $704,680 Costs and operating expenses: Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674,667 111,104 220,781 6,734 12,337 483,420 63,584 155,324 (6,053) 5,155 414,799 66,913 146,564 3,142 — Total costs and operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . 1,025,623 701,430 631,418 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other-than-temporary impairment recovery (loss) on investments . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on debt extinguishment and interest rate swaps, net Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit (expense) 194,711 1,515 (140,475) 3,626 690 (10,187) 49,880 (12,999) 181,079 2,384 (74,232) (2,590) 2,387 — 109,028 (39,597) 73,262 8,940 (61,677) (1,527) 1,307 — 20,305 87,619 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,881 $ 69,431 $107,924 Earnings per share: Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.84 $ 1.80 $ 2.91 Weighted-average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,742 38,488 37,120 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.82 $ 1.75 $ 2.79 Weighted-average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,810 39,676 41,582 See accompanying notes to consolidated financial statements. F-3 EQUINIX, INC. Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss) For the Three Years Ended December 31, 2010 (in thousands, except share data) Common stock Shares Amount F - 4 Balances as of December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,561,238 733,130 Issuance of common stock upon exercise of common stock options and vesting of restricted stock . . . . . . . . 119,354 Issuance of common stock under employee stock purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331,644 Issuance of common stock upon conversion of convertible subordinated debentures . . . . . . . . . . . . . . . . . . . — Tax benefit from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation, net of estimated forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Comprehensive income (loss): Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation loss, net of tax of $0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on interest rate swaps, net of tax of $4,660 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on investments, net of tax of $169 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — Balances as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,745,366 933,212 Issuance of common stock upon exercise of common stock options and vesting of restricted stock . . . . . . . . 151,863 Issuance of common stock under employee stock purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 484,809 Issuance of common stock upon conversion of convertible subordinated debentures . . . . . . . . . . . . . . . . . . . — Tax benefit from employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Issuance of 4.75% convertible subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Issuance of capped call . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation, net of estimated forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation gain, net of tax of $1,485 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on interest rate swaps, net of tax of $1,191 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on investments, net of tax of $373 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — Balances as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,315,250 1,185,814 Issuance of common stock upon exercise of common stock options and vesting of restricted stock . . . . . . . . 207,212 Issuance of common stock under employee stock purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,458,413 Issuance of common stock for the Switch and Data acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Stock-based compensation assumed in the Switch and Data acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation, net of estimated forfeitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency translation loss, net of tax of $1,333 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement of interest rate swaps, net of tax of $3,469 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on investments, net of tax of $146 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — $ 37 1 — — — — — — — — — 38 1 — — — — — — — — — — — 39 1 — 6 — — — — — — — Additional paid-in capital $1,429,178 19,914 6,315 13,072 696 55,659 — — — — — 1,524,834 30,388 6,617 19,150 514 80,010 (49,654) 53,803 — — — — — 1,665,662 30,120 9,697 549,383 16,508 70,216 — — — — — Accumulated other comprehensive income (loss) $ (3,888) — — — — — — (142,140) (6,350) (422) (148,912) (152,800) — — — — — — — — 53,624 1,418 520 55,562 (97,238) — — — — — — (19,502) 4,933 (211) (14,780) Accumulated deficit $(563,335) — — — — — 107,924 — — — 107,924 (455,411) — — — — — — — 69,431 — — — 69,431 (385,980) — — — — — 36,881 — — — 36,881 Total stockholders’ equity $ 861,992 19,915 6,315 13,072 696 55,659 107,924 (142,140) (6,350) (422) (40,988) 916,661 30,389 6,617 19,150 514 80,010 (49,654) 53,803 69,431 53,624 1,418 520 124,993 1,182,483 30,121 9,697 549,389 16,508 70,216 36,881 (19,502) 4,933 (211) 22,101 Balances as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,166,689 $ 46 $2,341,586 $(112,018) $(349,099) $1,880,515 See accompanying notes to consolidated financial statements. EQUINIX, INC. Consolidated Statements of Cash Flows (in thousands) Years ended December 31, 2010 2009 2008 Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: $ 36,881 $ 69,431 $ 107,924 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of asset retirement obligation and accrued restructuring charges . . . . . . . . . . . . . . Amortization of debt issuance costs and debt discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized net (gains) losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on debt extinguishment and interest rate swaps, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in operating assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,544 67,489 6,734 13,632 3,128 27,915 2,056 (11) 10,187 2,265 (39,886) 6,110 (11,865) 30,363 (4,426) (4,244) 167,975 53,056 (6,053) 5,555 1,581 18,791 (15) 2,579 — 1,149 2,277 27,981 (10,371) 22,762 (1,771) 565 152,437 55,085 3,142 6,610 1,682 11,523 1,582 (498) — 1,466 (9,152) (94,229) (7,137) 9,937 (2,763) 29,949 Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392,872 355,492 267,558 Cash flows from investing activities: Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturities of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of Switch and Data, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of Upminster, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of Virtu, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of Amsterdam IBX property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of other property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Release of restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investing activities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (744,798) 25,174 827,540 (113,289) — — (14,861) (579,397) (1,582) 244 — (379,644) 27,420 179,566 — (28,176) — — (369,542) (896) 13,015 79 (240,556) 131,631 114,361 — — (23,241) — (447,032) (14,234) 1,031 — Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (600,969) (558,178) (478,040) Cash flows from financing activities: Proceeds from employee equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of capital lease and other financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayment of mortgage and loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capped call costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt extinguishment costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financing obligations, net 39,817 750,000 — 121,581 (16,133) (558,007) — (23,124) (4,448) — Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309,686 Effect of foreign currency exchange rates on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,804) 96,785 346,056 37,006 — 373,750 29,474 (5,279) (51,118) (49,664) (8,220) — (2,351) 323,598 4,937 125,849 220,207 26,230 — — 142,373 (3,832) (19,296) — (948) — 579 145,106 (5,050) (70,426) 290,633 Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 442,841 $ 346,056 $ 220,207 Supplemental cash flow information: Cash paid for taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,043 $ 9,290 $ 98 Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 97,943 $ 63,281 $ 53,373 See accompanying notes to consolidated financial statements. F-5 EQUINIX, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Business and Summary of Significant Accounting Policies Nature of Business Equinix, Inc. (“Equinix” or the “Company”) was incorporated in Delaware on June 22, 1998. Equinix provides global data center services. Global enterprises, content providers, financial companies and network service providers rely upon Equinix’s insight and expertise to protect and connect their most valued information assets. The Company operates 92 International Business Exchange (“IBX”) data centers, or IBX data centers, across 35 markets in North America, Europe and Asia-Pacific where customers directly interconnect with a network ecosystem of partners and customers. More than 360 network service providers offer access to more than 90% of the world’s Internet routes inside the Company’s IBX data centers. This access to Internet routes provides Equinix customers improved reliability and streamlined connectivity while significantly reducing costs by reaching a critical mass of networks within a centralized physical location. On April 30, 2010, the Company completed its acquisition of Switch & Data Facilities Company, Inc. (“Switch and Data”), a publicly-held company headquartered in Tampa, Florida (the “Switch and Data Acquisition”) (see Note 2). Basis of Presentation, Consolidation and Foreign Currency The accompanying consolidated financial statements include the accounts of Equinix and its subsidiaries, including the operations of Switch and Data from May 1, 2010, Upminster GmbH (“Upminster”) from July 22, 2009 and Virtu Secure Webservices B.V. (“Virtu”) from February 5, 2008 (see Note 2). All significant intercompany accounts and transactions have been eliminated in consolidation. Foreign exchange gains or losses resulting from foreign currency transactions, including intercompany foreign currency transactions, that are anticipated to be repaid within the foreseeable future, are reported within other income (expense) on the Company’s accompanying consolidated statements of operations. For additional information on the impact of foreign currencies to the Company’s consolidated financial statements, see “Comprehensive Income (Loss)” below. Reclassifications Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the consolidated financial statement presentation as of and for the year ended December 31, 2010. Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Cash, Cash Equivalents and Short-Term and Long-Term Investments The Company considers all highly liquid instruments with an original maturity from the date of purchase of three months or less to be cash equivalents. Cash equivalents consist of money market mutual funds and highly liquid debt securities of agencies of the U.S. government and the U.S. government with maturities up to 90 days. Short-term investments generally consist of securities with original maturities of between 90 days and one year F-6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. and are highly liquid debt securities of corporations, agencies of the U.S. government and the U.S. government and asset-backed securities. Long-term investments generally consist of debt securities of corporations, agencies of the U.S. government and the U.S. government and asset-backed securities with maturities greater than 360 days. The Company’s fixed income securities are classified as “available-for-sale” and are carried at fair value with unrealized gains and losses reported in stockholders’ equity as a component of other comprehensive income. The cost of securities sold is based on the specific identification method. The Company reviews its investment portfolio quarterly to determine if any securities may be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades. Financial Instruments and Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and short-term and long-term investments, to the extent outstanding balances exceed federal insurance limits, and accounts receivable. Risks associated with cash, cash equivalents and short-term and long- term investments are mitigated by the Company’s investment policy, which limits the Company’s investing to only those marketable securities rated at least A-1/P-1 and A-/A3, as determined by independent credit rating agencies. A significant portion of the Company’s customer base is comprised of businesses throughout North America. However, a portion of the Company’s revenues are derived from the Company’s Europe and Asia- Pacific operations. The following table sets forth percentages of the Company’s revenues by geographic regions for the years ended December 31: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64% 61% 63% 23% 26% 25% 13% 13% 12% 2010 2009 2008 No single customer accounted for greater than 10% of accounts receivable or revenues as of or for the years ended December 31, 2010, 2009 and 2008. Property, Plant and Equipment Property, plant and equipment are stated at the Company’s original cost or relative fair value for acquired property, plant and equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements and assets acquired under capital leases are amortized over the shorter of the lease term or the estimated useful life of the asset or improvement, unless they are considered integral equipment, in which case they are amortized over the lease term. Leasehold improvements acquired in a business combination are amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date of acquisition and leasehold improvements that are placed into service significantly after and not contemplated at or near the beginning of the lease term are amortized over the shorter of the useful life of the assets or a term that includes required lease periods and renewals that are deemed to be reasonably assured at the date the leasehold improvements are purchased. F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. During the year ended December 31, 2009, the Company reassessed the estimated useful lives of certain of its property, plant and equipment as part of a review of the related assumptions. As a result, the estimated useful lives of certain of the Company’s property, plant and equipment within the below table were affected. Estimated Useful Life Original Revised IBX plant and machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Site improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBX equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2-13 10-20 10-15 40-50 2-13 2-5 2-5 2-25 10-20 10-15 30-50 2-15 2-5 2-10 The Company undertook this review due to its determination that it was generally using certain of its existing assets longer than originally anticipated and, therefore, certain estimated useful lives have been lengthened. The change in the estimated useful lives of certain of the Company’s property, plant and equipment was accounted for as a change in accounting estimate on a prospective basis effective July 1, 2009. The change in estimated useful lives of certain of the Company’s property, plant and equipment, which has resulted in less depreciation expense than would have otherwise been recorded, resulted in the following increases for the year ended December 31, 2009 (in thousands, except per share amounts): Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share: $12,020 6,934 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.18 0.17 During the preparation of the Company’s financial statements for the year ended December 31, 2009, in conjunction with its reassessment of the estimated useful lives of certain of its property, plant and equipment described above, the Company identified errors in its financial statements for the years ended December 31, 2008 and 2007 and the Company’s financial statements as of and for the nine month period ended September 30, 2009. These errors related to an overstatement of depreciation expense in connection with the Company’s European operating segment totaling $1,810,000, $2,028,000 and $375,000 for the nine months ended September 30, 2009 and for the years ended December 31, 2008 and 2007, respectively, for a total error correction of $4,213,000. The Company corrected these errors in its financial statements for the quarter ended December 31, 2009, which reduced depreciation expense for the three months ended December 31, 2009 by $4,213,000. The Company did not believe that these adjustments were material to the consolidated financial statements for the year ended December 31, 2009 or to any annual or quarterly periods’ consolidated financial statements for the years ended December 31, 2008 and 2007 and the nine months ended September 30, 2009. As a result, the Company did not restate any prior period amounts. Construction in Progress Construction in progress includes direct and indirect expenditures for the construction and expansion of IBX data centers and is stated at original cost. The Company has contracted out substantially all of the construction and expansion efforts of its IBX data centers to independent contractors under construction contracts. Construction in progress includes certain costs incurred under a construction contract including project management services, engineering and schematic design services, design development, construction services and F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. other construction-related fees and services. In addition, the Company has capitalized certain interest costs during the construction phase. Once an IBX data center or expansion project becomes operational, these capitalized costs are allocated to certain property, plant and equipment categories and are depreciated over the estimated useful life of the underlying assets. The following table sets forth total interest costs expensed and total interest costs capitalized for the years ended December 31 (in thousands): Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,475 10,349 $74,232 12,853 $61,677 7,946 Interest charges incurred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,824 $87,085 $69,623 2010 2009 2008 Asset Retirement Costs The fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated retirement costs are capitalized and included as part of the carrying value of the long-lived asset and amortized over the useful life of the asset. Subsequent to the initial measurement, the Company accretes the liability in relation to the asset retirement obligations over time and the accretion expense is recorded as a cost of revenue. The Company’s asset retirement obligations are primarily related to its IBX data centers, of which the majority are leased under long-term arrangements, and, in certain cases, are required to be returned to the landlords in their original condition. All of the Company’s IBX data center leases have been subject to significant development by the Company in order to convert them from, in most cases, vacant buildings or warehouses into IBX data centers. The majority of the Company’s IBX data centers’ initial lease terms expire at various dates ranging from 2011 to 2035 and most of them enable the Company to extend the lease terms. The following table summarizes the activity of the Company’s asset retirement obligation liability (in thousands): Asset retirement obligations as of December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset retirement obligations as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset retirement obligations as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . Additions (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,759 2,865 — 890 (250) 12,264 4,331 (75) 1,149 41 17,710 27,046 (1,010) 2,825 196 Asset retirement obligations as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . $46,767 (1) Includes $20,262 assumed in connection with the Switch and Data Acquisition. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Goodwill and Other Intangible Assets The Company has three reportable segments comprised of the 1) North America, 2) Europe and 3) Asia- Pacific geographic regions, which the Company also determined are its reporting units. As of December 31, 2010, the Company had goodwill attributable to its North America reporting unit, Europe reporting unit and Asia-Pacific reporting unit. Prior to 2010, the Company tested the goodwill attributable to the Europe and Asia-Pacific reporting units annually as of August 31st and December 31st, respectively. In the second quarter of 2010, the Company completed the Switch and Data Acquisition (see Note 2), which created goodwill in its North America reporting unit, and changed its method of applying the accounting principle related to annual goodwill impairment testing by conforming the testing of goodwill for all three reporting units to November 30th of each year commencing on November 30, 2010. As of December 31, 2010, the Company concluded that its goodwill attributed to the Company’s North America, Europe and Asia-Pacific reporting units was not impaired as the fair value of its North America, Europe and Asia-Pacific reporting units exceeded the carrying value of the reporting unit, including goodwill. In order to determine the fair value of the Company’s reporting units, the Company utilizes the discounted cash flow and market methods. The Company has consistently utilized both methods in its goodwill impairment tests and weights both results equally. The Company uses both methods in its goodwill impairment tests as it believes both methods, in conjunction with each other, provide a reasonable estimate of the determination of fair value of the reporting unit – the discounted cash flow method being specific to anticipated future results of the reporting unit and the market method, which is based on the Company’s market sector including its competitors. The assumptions supporting the discounted cash flow method, including the discount rate, which was assumed to be 10.0% for the North America and Europe reporting units and 13.0% for the Asia- Pacific reporting unit, were determined using the Company’s best estimates as of the date of the impairment review. The Company has performed various sensitivity analyses on certain of the assumptions used in the discounted cash flow method, such as forecasted revenues and discount rate, and notes that no reasonably possible changes would reduce the fair value of the reporting unit to such a level that would cause an impairment charge. Impairment assessments inherently involve judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact the Company’s assumptions as to prices, costs, growth rates or other factors that may result in changes in the Company’s estimates of future cash flows. Although the Company believes the assumptions it used in testing for impairment are reasonable, significant changes in any one of the Company’s assumptions could produce a significantly different result. Indicators of potential impairment that might lead the Company to perform interim goodwill impairment assessments include significant and unforeseen customer losses, a significant adverse change in legal factors or in the business climate, a significant adverse action or assessment by a regulator, a significant stock price decline or unanticipated competition. For further information on goodwill and other intangible assets, see Note 4 below. Derivatives and Hedging Activities The Company recognizes all derivatives on the consolidated balance sheet at fair value. The accounting for changes in the value of a derivative depends on whether the contract is for trading purposes or has been designated and qualifies for hedge accounting. In order to qualify for hedge accounting, a derivative must be considered highly effective at reducing the risk associated with the exposure being hedged. In order for a derivative to be designated as a hedge, there must be documentation of the risk management objective and strategy, including identification of the hedging instrument, the hedged item and the risk exposure, and how effectiveness is to be assessed prospectively and retrospectively. To assess effectiveness, the Company uses a regression analysis. The extent to which a hedging instrument has been and is expected to continue to be effective at achieving offsetting changes in cash flows is assessed and F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. documented at least quarterly. Any ineffectiveness is reported in current-period earnings. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued. For qualifying cash flow hedges, the effective portion of the change in the fair value of the derivative is recorded in other comprehensive income (loss) and recognized in the consolidated statements of operations when the hedged cash flows affect earnings. The ineffective portions of cash flow hedges are immediately recognized in earnings. If the hedge relationship is terminated, then the change in fair value of the derivative recorded in other comprehensive income (loss) is recognized in earnings when the cash flows that were hedged occur, consistent with the original hedge strategy. For hedge relationships discontinued because the forecasted transaction is not expected to occur according to the original strategy, any related derivative amounts recorded in other comprehensive income (loss) are immediately recognized in earnings. The Company does not use derivatives for speculative or trading purposes. For further information on derivatives and hedging activities, see Note 5 below. Fair Value of Financial Instruments The carrying value of the Company’s cash and cash equivalents, short-term and long-term investments represent their fair value, while the Company’s accounts receivable, accounts payable and accrued expenses and accrued property, plant and equipment approximate their fair value due primarily to the short-term maturity of the related instruments. The fair value of the Company’s convertible debt, which is traded in the market, is based on quoted market prices. The fair value of the Company’s mortgage and loans payable, which are not traded in the market, is estimated by considering the Company’s credit rating, current rates available to the Company for debt of the same remaining maturities and the terms of the debt. The following table sets forth the estimated fair values of the Company’s mortgage and loans payable, senior notes and convertible debt as of (in thousands): December 31, 2010 December 31, 2009 Carrying Value Fair Value Carrying Value Fair Value Mortgage and Loans Payable: New Asia-Pacific financing . . . . . . . . . . . . . . . . . . . . . . . . . . European financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chicago IBX financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,315 — — — — — — $126,958 — — — — — — $ — $ — 111,375 130,058 109,700 109,991 83,406 91,756 60,827 64,559 21,739 24,559 7,941 9,311 $120,315 $126,958 $430,234 $394,988 Senior Notes: Senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $750,000 $816,270 $ — $ — Convertible Debt: 2.50% convertible subordinated notes . . . . . . . . . . . . . . . . . . 3.00% convertible subordinated notes . . . . . . . . . . . . . . . . . . 4.75% convertible subordinated notes . . . . . . . . . . . . . . . . . . $234,185 395,986 286,166 $246,280 399,946 348,786 $222,943 395,986 274,777 $228,935 461,324 307,248 $916,337 $995,012 $893,706 $997,507 F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Fair Value Measurements The Company measures and reports certain financial assets and liabilities at fair value on a recurring basis, including its investments in money market funds and available-for-sale debt investments in other public companies, governmental units and other agencies and derivatives. The Company also follows the accounting standard for the measurement of fair value for nonfinancial assets and liabilities on a nonrecurring basis. These include: • Nonfinancial assets and nonfinancial liabilities initially measured at fair value in a business combination or other new basis event, but not measured at fair value in subsequent reporting periods; • Reporting units and nonfinancial assets and nonfinancial liabilities measured at fair value for goodwill impairment test; • Indefinite-lived intangible assets measured at fair value for impairment assessment; • Nonfinancial long-lived assets or asset groups measured at fair value for impairment assessment or disposal; • Asset retirement obligations initially measured at fair value but not subsequently measured at fair value; and • Nonfinancial liabilities associated with exit or disposal activities initially measured at fair value but not subsequently measured at fair value. During the three months ended March 31, 2010, the Company adopted an accounting standard update (“ASU”) which requires new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, and its adoption did not have any significant impact on the Company’s consolidated financial statements. For further information on fair value measurements, see Note 6 below. Impairment of Long-Lived Assets The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable such as a significant decrease in market price of a long-lived asset, a significant adverse change in legal factors or business climate that could affect the value of a long-lived asset or a continuous deterioration of the Company’s financial condition. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated discounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Revenue Recognition Equinix derives more than 90% of its revenues from recurring revenue streams, consisting primarily of (1) colocation services, such as the licensing of cabinet space and power; (2) interconnection services, such as cross connects and Equinix Exchange ports; (3) managed infrastructure services, such as Equinix Direct and (4) other services consisting of rental income from tenants or subtenants. The remainder of the Company’s revenues are from non-recurring revenue streams, such as from the recognized portion of deferred installation revenues, professional services, contract settlements and equipment sales. Revenues from recurring revenue streams are generally billed monthly and recognized ratably over the term of the contract, generally one to three years for IBX data center space customers. Non-recurring installation fees, although generally paid in a lump F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. sum upon installation, are deferred and recognized ratably over the expected life of the installation. Professional service fees are recognized in the period in which the services were provided and represent the culmination of a separate earnings process as long as they meet the criteria for separate recognition under the accounting standard related to revenue arrangements with multiple deliverables. Revenue from bandwidth and equipment sales is recognized on a gross basis in accordance with the accounting standard related to reporting revenue gross as a principal versus net as an agent, primarily because the Company acts as the principal in the transaction, takes title to products and services and bears inventory and credit risk. To the extent the Company does not meet the criteria for recognizing bandwidth and equipment services as gross revenue, the Company records the revenue on a net basis. Revenue from contract settlements, when a customer wishes to terminate their contract early, is generally recognized on a cash basis, when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized. The Company occasionally guarantees certain service levels, such as uptime, as outlined in individual customer contracts. To the extent that these service levels are not achieved, the Company reduces revenue for any credits given to the customer as a result. The Company generally has the ability to determine such service level credits prior to the associated revenue being recognized, and historically, these credits have generally not been significant. There were no significant service level credits issued during the years ended December 31, 2010, 2009 and 2008. Revenue is recognized only when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. It is the Company’s customary business practice to obtain a signed master sales agreement and sales order prior to recognizing revenue in an arrangement. Taxes collected from customers and remitted to governmental authorities are reported on a net basis and are excluded from revenue. The Company assesses collectibility based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers although in certain cases the Company obtains a security interest in a customer’s equipment placed in its IBX data centers or obtains a deposit. If the Company determines that collection of a fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash. In addition, the Company also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for which the Company had expected to collect the revenues. If the financial condition of the Company’s customers were to deteriorate or if they became insolvent, resulting in an impairment of their ability to make payments, greater allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the Company’s reserves. A specific bad debt reserve of up to the full amount of a particular invoice value is provided for certain problematic customer balances. An additional reserve is established for all other accounts based on the age of the invoices and an analysis of historical credits issued. Delinquent account balances are written-off after management has determined that the likelihood of collection is not probable. Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts that are expected more likely than not to be realized in the future. As a result of the adoption of an accounting standard update for business combinations on January 1, 2009, the Company’s tax provision would be reduced in future periods to the extent that the Company had not recognized the deferred tax assets associated with any subsidiaries acquired in previous business combinations for which goodwill exists. The recognition of such deferred tax assets in the periods subsequent to the adoption of the accounting standard update will benefit the Company’s consolidated statements of operations at the time such recognition occurs. Prior to the accounting standard update, such releases were recorded against goodwill. The Company recognizes interest and penalties related to unrecognized tax benefits, which is included within income tax benefit (expense) in the consolidated statements of operations. Stock-Based Compensation Stock-based compensation cost is measured at the grant date for all stock-based awards made to employees and directors based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. To the extent that the Company grants stock options to its employees, it uses the Black-Scholes option-pricing model to determine the fair value of stock options. The determination of the fair value of stock options is affected by assumptions regarding a number of complex and subjective variables including the Company’s expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The Company estimated the expected volatility by using the average historical volatility of its common stock that it believed was the best representative of future volatility. The risk-free interest rate used was based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the equity awards. The Company does not anticipate paying any cash dividends in the foreseeable future and, therefore, the expected dividend rate used was zero. The expected term of options used was calculated by taking the average of the vesting term and the contractual term of the option. Certain of the Company’s employee equity awards had vesting criteria based upon the achievement of certain pre-determined Company stock price targets, which the Company refers to as market price conditions. The Company used a Monte Carlo simulation option-pricing model to determine the fair value of restricted stock or restricted stock unit grants that have both a service and market price condition. However, commencing in February 2008, the Company ceased granting equity awards with market price conditions. The Company grants restricted stock units to its employees and these equity awards have only either a service condition or a service and performance condition. Any performance conditions contained in an equity award are tied to the financial performance of the Company or a specific region of the Company. The Company assesses the probability of meeting these performance conditions on a quarterly basis. The majority of the Company’s equity awards vest over four years, although certain of the equity awards for executives vest over a range of two to four years. The valuation of restricted stock units with only a service condition or a service and performance condition requires no significant assumptions as the fair value for these types of equity awards is based solely on the fair value of the Company’s stock price on the date of grant. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The accounting standard for stock compensation does not allow the recognition of unrealized tax benefits associated with the tax deductions in excess of the compensation recorded (excess tax benefit) until the excess tax benefit is realized (i.e., reduces taxes payable). The Company will recognize a benefit from stock-based compensation in equity if the excess tax benefit is realized by following the “with-and-without” approach. The Company recorded the excess tax benefit of approximately $514,000 and $696,000, respectively, during the years ended December 31, 2009 and 2008. The Company did not record any excess tax benefit during the year ended December 31, 2010. For further information on stock-based compensation, see Note 11 below. Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income (loss) and comprehensive income (loss) for Equinix results from foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities and cash flow hedges (interest rate swaps). The financial position of foreign subsidiaries is translated using the exchange rates in effect at the end of the period, while income and expense items are translated at average rates of exchange during the period. Gains or losses from translation of foreign operations where the local currency is the functional currency are included as other comprehensive income (loss). The net gains and losses resulting from foreign currency transactions are recorded in net income (loss) in the period incurred and reported within other income and expense. Certain inter- company balances are designated as long-term. Accordingly, exchange gains and losses associated with these long-term inter-company balances are recorded as a component of other comprehensive income (loss), along with translation adjustments. How the U.S. dollar performs against certain of the currencies of the foreign countries in which the Company operates can have a significant impact to the Company. Strengthening and weakening of the U.S. dollar against theses currencies has significantly impacted the Company’s consolidated balance sheets (as evidenced in the Company’s foreign currency translation loss), as well as its consolidated statements of operations as amounts denominated in foreign currencies can increase or decrease the Company’s revenues and expenses. To the extent that the U.S. dollar strengthens or weakens further, this will continue to impact the Company’s consolidated balance sheets and consolidated statements of operations including the amount of revenue that the Company reports in future periods. For further information on derivatives and hedging instruments, see Note 5 below. Earnings Per Share Basic earnings per share is computed using net income (loss) and the weighted-average number of common shares outstanding. Diluted earnings per share is computed using net income, adjusted for interest expense as a result of the assumed conversion of the Company’s Convertible Subordinated Debentures, 2.50% Convertible Subordinated Notes, 3.00% Convertible Subordinated Notes and 4.75% Convertible Subordinated Notes, if dilutive, and the weighted-average number of common shares outstanding plus any dilutive potential common shares outstanding. Dilutive potential common shares include the assumed exercise, vesting and issuance activity of employee equity awards using the treasury stock method, as well as warrants and shares issuable upon the conversion of the Convertible Subordinated Debentures, 2.50% Convertible Subordinated Notes, 3.00% Convertible Subordinated Notes and 4.75% Convertible Subordinated Notes. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31 (in thousands, except per share amounts): 2010 2009 2008 Numerator: Numerator for basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of assumed conversion of convertible subordinated debentures and notes: Interest expense, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,881 $69,431 $107,924 — 23 8,059 Numerator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . $36,881 $69,454 $115,983 Denominator: Denominator for basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,742 38,488 37,120 Effect of dilutive securities: Convertible subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00% convertible subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total dilutive potential shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,068 1,068 211 — 977 1,188 772 2,945 745 4,462 Denominator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . 44,810 39,676 41,582 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.84 0.82 $ $ 1.80 1.75 $ $ 2.91 2.79 The following table sets forth potential shares of common stock that are not included in the diluted earnings per share calculation above because to do so would be anti-dilutive for the years ended December 31 (in thousands): Shares reserved for conversion of convertible 2.50% convertible subordinated notes . . . Shares reserved for conversion of convertible 3.00% convertible subordinated notes . . . Shares reserved for conversion of convertible 4.75% convertible subordinated notes . . . Common stock warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock related to employee equity awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 2009 2008 2,232 2,945 4,433 — 843 2,232 2,232 2,945 — 2,453 — 1 1,835 1 1,045 10,453 8,676 4,068 Recent Accounting Pronouncements In October 2009, the FASB issued an accounting standards update (“ASU”), which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This ASU is effective prospectively for revenue arrangements entered into or materially modified beginning in fiscal years on or after June 15, 2010. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its condensed consolidated financial statements, if any. In January 2010, the FASB issued an ASU, which amends the use of fair value measures and the related disclosures. This ASU requires disclosure of activity in Level 3 fair value measurements on a gross basis, which is effective for fiscal years beginning after December 15, 2010. The Company adopted this ASU during the three F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. months ended March 31, 2010 with respect to the new disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, and its adoption did not have any significant impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact that the disclosure of activity in Level 3 fair value measurements will have on its consolidated financial statements, if any. 2. Acquisitions Switch and Data Acquisition On April 30, 2010 (the “Acquisition Date”), the Company acquired 100% of the issued and outstanding share capital of Switch and Data, a publicly-held company headquartered in Tampa, Florida. Switch and Data operated 34 data centers in the U.S. and Canada. The combined company operates under the Equinix name. There were no historical transactions between Equinix and Switch and Data. The Company included Switch and Data’s results of operations from May 1, 2010 and estimated the fair value of assets acquired and liabilities assumed in its consolidated balance sheets beginning April 30, 2010. The Company incurred acquisition costs of $11,094,000 and $4,091,000, respectively, for the years ended December 31, 2010 and 2009 related to the Switch and Data Acquisition which were included in the consolidated statements of operations. Additionally, as a result of the Switch and Data Acquisition, the Company incurred a restructuring charge of $5,360,000 during the year ended December 31, 2010 (see Note 16). Fair Value of Consideration Transferred Under the final terms of the Switch and Data Acquisition, each stock-electing share received 0.19409 shares of Equinix common stock, each cash-electing share received $19.06 in cash, and each non-electing share received 0.11321688 shares of Equinix common stock and $7.94189104 in cash, in each case subject to the terms of the merger agreement. Additionally, the Company assumed Switch and Data’s outstanding employee equity awards. The following table presents the fair value of consideration transferred to acquire Switch and Data at the Acquisition Date (dollars in thousands): Cash (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switch and Data employee equity awards (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $134,007 549,389 16,508 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $699,904 (1) Represents payment for approximately 20% of Switch and Data’s total common stock outstanding as of the Acquisition Date. (2) Fair value of 5,458,413 shares of the Company’s common stock issued in exchange for approximately 80% of Switch and Data’s total common stock outstanding as of the Acquisition Date. The value of the Company’s common stock issued was determined based on the Company’s closing share price on the Acquisition Date, or $100.65 per share. (3) Represents fair value attributed to vested shares of Switch and Data employee equity awards which the Company assumed. The Company issued 476,943 options to purchase the Company’s common stock and 98,509 restricted stock units of the Company’s common stock to Switch and Data employees with an aggregate fair value of $35,395 in exchange for their options to purchase shares of and restricted stock units of Switch and Data (see Note 11). F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Purchase Price Allocation The Switch and Data Acquisition was accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price was allocated to Switch and Data’s net tangible and intangible assets based upon their fair value as of the Acquisition Date. During the quarter ended December 31, 2010, the Company finalized its purchase accounting after adjustments were made to the preliminary purchase price to reflect the finalization of liabilities acquired, deferred taxes and fair value of property, plant and equipment acquired and residual goodwill. The adjustments to the preliminary purchase allocation, in aggregate, had an insignificant impact to the Company’s financial statements as of and for the eight months ended December 31, 2010. Based upon the purchase price and the valuation of Switch and Data, the purchase price allocation was as follows (in thousands): Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset—customer contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset—favorable leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset—other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current portion of loan payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital leases, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unfavorable leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,718 12,763 2,125 460,474 408,730 98,920 13,680 3,370 1,472 1,022,252 (21,656) (10,363) (10,402) (138,938) (12,157) (38,998) (2,580) (66,460) (20,794) Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 699,904 The following table presents certain information on the acquired identifiable intangible assets (dollars in thousands): Intangible assets Customer contracts . . . . . . . . . . . . . . . . . . . . . . . Favorable leases . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unfavorable leases . . . . . . . . . . . . . . . . . . . . . . . . Fair value $98,920 13,680 3,370 (2,580) Estimated useful lives (years) Weighted-average estimated useful lives (years) 11 3 – 16 0 – 10 3 – 15 11 8.6 4.9 8.3 The fair value of customer contracts was estimated by applying an income approach. The fair value was determined by calculating the present value of estimated future operating cash flows generated from exisiting customers less costs to realize the revenue. The Company applied a discount rate of approximately 14%, which reflects the nature of the asset, to the estimated future operating cash flows. Other significant assumptions used to estimate the fair value of the customer contracts include projected revenue growth, customer attrition rates, sales F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. and marketing expenses and operating margins. The fair values of favorable and unfavorable leases were estimated by applying an income approach. The fair value was determined by calculating the difference between the discounted cash flows over the remaining term of each lease using contractual lease rates and market lease rates. The Company applied a discount rate ranging from 8.25% to 11.5% depending on the type, location and duration of each lease. Another significant assumption used in estimating the fair values of the favorable and unfavorable leases was the market lease rates. The fair value of the other acquired identifiable intangible assets were estimated by applying an income or cost approach as appropriate. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements. The Company determined the fair value of the term loan and revolving credit facility assumed in the Switch and Data Acquisition by estimating Switch and Data’s debt rating and reviewed market data with a similar debt rating and other characteristics of the debt, including the maturity date and security type. The Company determined that the book value of $138,938,000 approximated the fair value as of the Acquisition Date. The Company determined the fair value of the two property capital lease liabilities assumed in the Switch and Data Acquisition of $40,425,000 by calculating the present value of future cash flows using a discount rate of approximately 8.6%, which was equal to the average yield of industrial bonds with similar remaining terms as the leases. The Company determined that the fair value of the equipment capital lease liability assumed in the Switch and Data Acquisition was equal to the fair value of the underlying assets of $9,155,000 as of the Acquisition Date because the lease contained a bargain purchase option and the title of the leased property is expected to be transferred to the Company at the end of the lease term. A total of $408,730,000 has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. Goodwill is attributable to the workforce of Switch and Data and the significant synergies expected to arise after the Switch and Data Acquisition. Goodwill is not expected to be deductible for tax purposes. Goodwill will not be amortized and will be tested for impairment at least annually. Goodwill recorded as a result of the Switch and Data Acquisition is attributable to the Company’s North America reportable segment (see Note 15) and reporting unit (see Note 4). For additional information on the Switch and Data debt assumed, refer to Note 7. Unaudited Pro Forma Combined Consolidated Statements of Operations The consolidated financial statements of the Company include the operations of Switch and Data from May 1, 2010 for the year ended December 31, 2010. Switch and Data recognized revenues of $152,961,000 and incurred a net loss of $1,147,000 for the period from May 1, 2010 through December 31, 2010, which were included in the Company’s consolidated financial statements. The following unaudited pro forma combined consolidated financial information has been prepared to give effect to the Switch and Data Acquisition by the Company using the acquisition method of accounting and the Company’s repayment of Switch and Data’s outstanding debt and equipment capital lease (Note 7). The unaudited pro forma combined consolidated financial information reflect certain adjustments related to the Switch and Data Acquisition, such as additional depreciation and amortization expense on assets acquired from Switch and Data. These pro forma statements were prepared as if the Switch and Data Acquistion and the repayment of Switch and Data’s outstanding debt and equipment capital lease had been completed as of the beginning of each period presented. F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The unaudited pro forma combined consolidated financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the acquisition occurred on January 1, 2010 and 2009, nor is it necessarily indicative of the future results of operations of the combined company. The following table sets forth the unaudited pro forma consolidated combined results of operations for the years ended December 31 (in thousands, except per share data): Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Earnings per share: 2010 2009 $1,296,289 45,271 $1,087,947 60,222 Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.99 0.97 1.37 1.33 Upminster Acquisition On July 22, 2009, a wholly-owned subsidiary of the Company acquired all of the issued and outstanding share capital of Upminster GmbH, a company which owned a data center and the real estate on which it is situated in Frankfurt, Germany, for a cash payment of $28,208,000, excluding acquisition costs (the “Upminster Acquisition”). The combined company operates under the Equinix name. The Upminster Acquisition was accounted for using the acquisition method. The results of operations for Upminster are not significant to the Company; therefore, the Company does not present its purchase price allocation or pro forma combined results of operations. Virtu Acquisition On February 5, 2008, a wholly-owned subsidiary of the Company acquired all of the issued and outstanding share capital of Virtu, a provider of network-neutral data center services in the Netherlands, for a cash payment of $23,345,000, including closing costs (the “Virtu Acquisition”). Under the terms of the Virtu Acquisition, the Company may also pay additional future contingent consideration, which will be payable in the form of up to 20,000 shares of the Company’s common stock and cash of up to 1,500,000 Euros, contingent upon meeting certain pre-determined future annual operating targets from 2008 to 2011 (the 2008, 2009 and 2010 targets were not met and, therefore, no accrual was recognized). Such contingent consideration, if paid, will be recorded as additional goodwill. Virtu, a similar business to that of the Company, operated data centers in the Netherlands, and supplements the Company’s existing European operations. The combined company predominantly operates under the Equinix name. The results of operations for Virtu are not significant to the Company; therefore, the Company does not present its purchase price allocation or pro forma combined results of operations. 3. IBX Data Center Acquisitions and Expansions Although the Company owns certain of its IBX data centers through property acquisitions, the Company leases a majority of its IBX data centers under non-cancellable operating lease agreements. For further information on the Company’s operating lease commitments, see “Operating Lease Commitments” in Note 13 below. For those significant IBX acquisition and expansion projects not subject to operating lease arrangements, the Company presents the following information for the years ended December 31, 2010 and 2009: Amsterdam IBX Property Acquisition In December 2010, the Company purchased property, comprised of two buildings and prepaid ground leases, located in Amsterdam, Netherlands, for $21,737,000, including closing costs, which the Company paid in F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. full in a cash transaction in December 2010. The Company allocated $14,861,000 towards property, plant and equipment and $6,876,000 towards the prepaid ground leases, which is reflected as prepaid rent (reported within other current assets and other assets) on the accompanying consolidated balance sheet. The current terms for the prepaid ground leases extend through 2032 and 2033 and can be extended in 50-year increments in perpetuity. The Company had leased the two buildings prior to purchasing the property. Prior to April 2010, the leases were accounted for as operating leases; however, in April 2010, due to certain construction activity, the Company recorded building assets and a corresponding financing obligation liability for the building element of the leases. Just prior to the property purchase in December 2010, the building asset and financing obligation liability totaled $9,351,000 and $11,102,000, respectively, and the net difference totaling $1,751,000 was allocated to the purchased building assets. Sydney 3 IBX Expansion Project In June 2010, the Company entered into a lease for a building that the Company and the landlord will both jointly develop to meet the Company’s needs and which the Company will ultimately convert into its third IBX data center in Sydney, Australia (the “Sydney 3 IBX Expansion Project” and the “Sydney 3 Lease”). The Sydney 3 Lease has a term of 15 years and a total cumulative rent obligation of approximately $29,669,000 commencing September 2010. Monthly payments under the Sydney 3 Lease will commence in March 2012 and will be made through January 2030 at an effective interest rate of 2.86% The landlord began modifying the building structure to the Company’s specifications in June 2010. Pursuant to the accounting standard for lessee’s involvement in asset construction and for leasing transactions involving special-purpose entities, the Company is now considered the owner of the building during the construction phase due to the structural building work that the landlord is now undertaking on the Company’s behalf. As a result, the Company will be recording a building asset during the construction period and a related financing liability (the “Sydney 3 IBX Building Financing”), while the underlying land will be considered an operating lease. The building is expected to be completed during the first half of 2011. In connection with the Sydney 3 IBX Building Financing, the Company recorded a building asset and a corresponding financing obligation liability totaling approximately $11,053,000, representing the fair value of the existing building structure and the estimated percentage-of-completion of the building as of December 31, 2010. Paris 3 IBX Expansion Project In September 2008, the Company entered into a capital lease for a space within a warehouse building in the Paris, France metro area adjacent to one of its existing Paris IBX data centers, which will become the Company’s third IBX data center in the Paris metro area (the “Paris 3 IBX Lease”). The Company took possession of this property in the fourth quarter of 2008, and as a result, recorded a property, plant and equipment asset, as well as a capital lease obligation, totaling 28,137,000 Euros or approximately $39,311,000. In April 2010, the Company amended the Paris 3 IBX Lease to take on additional space effective July 2010 (the “Paris 3 IBX Lease Amendment”), which the Company will use to expand its Paris 3 IBX data center. The Paris 3 IBX Lease Amendment has the same lease end date as the Paris 3 IBX Lease and a total cumulative rent obligation of approximately $67,315,000. Monthly payments under the Paris 3 IBX Lease Amendment commenced in October 2010 and will be made through September 2020 at an effective interest rate of 8.46%. The Paris 3 IBX Lease was accounted for as a capital lease; however, due to structural work that was made to the property related to the new space, which the Company obtained in July 2010, pursuant to the accounting standards for lessee’s involvement in asset construction and for leasing transactions involving special-purpose entities, the Company is now considered the owner of the property. As a result, the Company removed both the capital lease asset, which had a net book value totaling approximately $35,149,000, and capital lease obligation totaling approximately $37,706,000 in July 2010 and replaced them with a building asset totaling approximately $56,370,000 and a related financing obligation liability (the “Paris 3 IBX Building Financing”) totaling approximately $58,927,000. F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Zurich IBX Expansion Project In June 2009, the Company entered into a lease for building space within a multi-floor, multi-tenant building that the Company will convert into its fourth IBX data center in Zurich, Switzerland (the “Zurich Lease” and the “Zurich IBX Expansion Project”). The Zurich Lease has a fixed term of 10 years, with options to extend for up to an additional 10 years, in five-year increments. Cumulative minimum payments under the Zurich Lease total approximately $8,729,000 over the Zurich Lease term, which does not include any rent obligation for the extension periods. Monthly payments under the Zurich Lease commenced in July 2009 and will be made through April 2019 at an effective interest rate of 4.68%. Pursuant to the accounting standard for lessee’s involvement in asset construction and for leasing transactions involving special-purpose entities, the Company is considered the owner of the leased building space during the construction phase due to some specific provisions contained in the Zurich Lease. As a result, during the year ended December 31, 2009, the Company recorded a building asset and a related financing liability (the “Zurich IBX Building Financing”) totaling approximately $11,470,000. 4. Balance Sheet Components Cash, Cash Equivalents and Short-Term and Long-Term Investments Cash, cash equivalents and short-term and long-term investments consisted of the following as of (in thousands): December 31, 2010 U.S. government and agency obligations . . . . . . . . . . . . . . . . . . . Cash and money markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . Less amounts classified as cash and cash Amortized Cost $ 391,945 195,860 2,632 2,266 592,703 Gross Unrealized Gains $ 12 — 13 112 137 equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total securities classified as investments . . . . . . . . . . . . . . . Less amounts classified as short-term investments . . . Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . (442,833) 149,870 (147,176) 2,694 $ (8) 129 (16) $ 113 Gross Unrealized Losses $— — — (1) (1) — (1) — $ (1) December 31, 2009 U.S. government and agency obligations . . . . . . . . . . . . . . . . . . . Cash and money markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total available-for-sale securities . . . . . . . . . . . . . . . . . . . . . Less amounts classified as cash and cash Amortized Cost $ 437,764 147,059 12,400 5,543 1,108 603,874 Gross Unrealized Gains $ 162 — 203 134 1 500 equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total securities classified as investments . . . . . . . . . . . . . . . Less amounts classified as short-term investments . . . Total long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . (346,059) 257,815 (248,300) 9,515 $ — 500 (208) $ 292 Gross Unrealized Losses $ (3) — — (4) — (7) 3 (4) — $ (4) Fair Value $ 391,957 195,860 2,645 2,377 592,839 (442,841) 149,998 (147,192) 2,806 $ Fair Value $ 437,923 147,059 12,603 5,673 1,109 604,367 (346,056) 258,311 (248,508) 9,803 $ F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. As of December 31, 2010 and December 31, 2009, cash equivalents included investments which were readily convertible to cash and had original maturity dates of 90 days or less. The maturities of securities classified as short-term investments were one year or less as of December 31, 2010 and December 31, 2009. The maturities of securities classified as long-term investments were greater than one year and less than three years as of December 31, 2010 and December 31, 2009. During the year ended December 31, 2008, the Company’s investments in a money market fund, the Reserve Primary Fund (the “Reserve”), suffered a decline in its Net Asset Value (“NAV”) below $1 per share when the Reserve valued its exposure to investments held in Lehman Brothers Holdings, Inc. (“Lehman Brothers”) at zero. The Reserve held investments in commercial paper and short term-notes issued by Lehman Brothers, which filed for Chapter 11 bankruptcy protection in September 2008. As a result of this decline, the Company reclassified its investments in the Reserve from Level 1 of the fair value hierarchy to Level 3 of the fair value hierarchy (see Note 6, “Fair Value Measurement”) during the year ended December 31, 2008. The following table summarizes the activities of the Company’s investments in the Reserve which were measured at fair value (in thousands): Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other-than-temporary impairment losses (1) . . . . . . . . . . . . . . . . . . . . . . . . . Cash settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,940 (1,527) (40,163) Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other-than-temporary impairment losses (1) . . . . . . . . . . . . . . . . . . . . . . . . . Cash settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,250 (2,590) (6,660) Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — (1) Included in the consolidated statements of operations. In January 2010 and July 2010, the Company received additional distributions totaling $3,626,000 from its investment in the Reserve. As a result, during the year ended December 31, 2010, the Company recorded a recovery of other-than-temporary impairment loss, which is included in the Company’s accompanying consolidated statement of operations. The other-than-temporary impairment losses that the Company recorded during the years ended December 31, 2008 and 2009 as described above were entirely credit losses with nothing required to be reclassified from earnings to accumulated other comprehensive income (loss) for non-credit portions in either period. As of December 31, 2010, the Company’s net unrealized gains (losses) on its available-for-sale securities were comprised of the following (in thousands): Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains Unrealized losses Net unrealized gain (losses) $ 8 16 113 $137 $— — (1) $ (1) $ 8 16 112 $136 None of the securities held at December 31, 2010 were other-than-temporarily impaired. F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. While certain marketable securities carry unrealized losses, the Company expects that it will receive both principal and interest according to the stated terms of each of the securities and that the increase or decline in market value is primarily due to changes in the interest rate environment from the time the securities were purchased as compared to interest rates at December 31, 2010. The following table summarizes the fair value and gross unrealized losses related to one available-for-sale security with an aggregate cost basis of $393,000, aggregated by type of investment and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2010 (in thousands): Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . Securities in a loss position for less than 12 months Securities in a loss position for 12 months or more Fair value $— $— Gross unrealized losses $— $— Fair value $392 $392 Gross unrealized losses $(1) $(1) While the Company does not believe it holds investments that are other-than-temporarily impaired and believes that the Company’s investments will mature at par, as of December 31, 2010, the Company’s investments are subject to the currently adverse market conditions. If market conditions were to deteriorate, the Company could sustain other-than-temporary impairments to its investment portfolio which could result in additional realized losses being recorded in interest income, net or securities markets could become inactive which could affect the liquidity of the Company’s investments. As securities mature, the Company has reinvested the proceeds in U.S. government securities, such as Treasury bills and Treasury notes, of a short-term duration and lower yield in order to meet its capital expenditure requirements. As a result, the Company expects to recognize lower interest income in future periods. As of December 31, 2009, the Company’s net unrealized gains (losses) on its available-for-sale securities were comprised of the following (in thousands): Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains Unrealized losses Net unrealized gain (losses) $— 208 292 $500 $ (3) — (4) $ (7) $ (3) 208 288 $493 None of the securities held at December 31, 2009 were other-than-temporarily impaired. F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The following table summarizes the fair value and gross unrealized losses related to six available-for-sale securities with an aggregate cost basis of $189,644,000, aggregated by type of investment and length of time that individual securities have been in continuous unrealized loss position, at December 31, 2009 (in thousands): U.S. government and agency obligations . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . Securities in a loss position for less than 12 months Securities in a loss position for 12 months or more Fair value $188,999 — $188,999 Gross unrealized losses $ (3) — $ (3) Fair value $— 638 $638 Gross unrealized losses $— (4) $ (4) Accounts Receivable Accounts receivable, net, consisted of the following as of December 31 (in thousands): Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,919 (90,753) (3,808) $126,122 (59,635) (1,720) 2010 2009 $116,358 $ 64,767 Trade accounts receivable are recorded at the invoiced amount and generally do not bear interest. The Company generally invoices its customers at the end of a calendar month for services to be provided the following month. Accordingly, unearned revenue consists of pre-billing for services that have not yet been provided, but which have been billed to customers in advance in accordance with the terms of their contract. The following table summarizes the activity of the Company’s allowance for doubtful accounts (in thousands): Balance as of December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries (write-offs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 446 1,582 3 6 Balance as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries (write-offs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries (write-offs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,037 (15) (346) 44 1,720 2,056 28 4 Balance as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,808 F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Other Current Assets Other current assets consisted of the following as of December 31 (in thousands): Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency forward contract receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,810 6,857 4,779 — 3,515 $10,277 7,081 2,083 498 1,795 2010 2009 $32,961 $21,734 Property, Plant and Equipment Property, plant and equipment consisted of the following as of December 31 (in thousands): 2010 2009 IBX plant and machinery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Site improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IBX equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Computer equipment and software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,522,561 884,654 339,636 307,933 263,995 114,263 89,312 15,602 128,535 $ 925,360 552,548 277,247 231,437 175,030 85,472 84,681 11,428 243,129 Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,666,491 (1,015,538) 2,586,332 (778,217) $ 2,650,953 $1,808,115 Leasehold improvements, IBX plant and machinery, computer equipment and software and buildings recorded under capital leases aggregated $117,289,000 and $87,138,000 at December 31, 2010 and 2009, respectively. Amortization on the assets recorded under capital leases is included in depreciation expense and accumulated depreciation on such assets totaled $29,235,000 and $22,381,000 as of December 31, 2010 and 2009, respectively. F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Goodwill and Other Intangibles Goodwill and other intangible assets, net, consisted of the following as of December 31 (in thousands): Goodwill: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $408,730 345,486 20,149 $ — 362,569 18,481 2010 2009 Other intangibles: Intangible asset—customer contracts . . . . . . . . . . . . . . . . . . . . Intangible asset—favorable leases . . . . . . . . . . . . . . . . . . . . . . Intangible asset—others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . 774,365 381,050 156,621 18,285 3,483 178,389 (27,444) 150,945 60,499 4,690 111 65,301 (14,286) 51,015 $925,310 $432,065 Changes in the carrying amount of goodwill by geographic regions are as follows (in thousands): Balance at December 31, 2008 . . . . . . . . . . . . . . . Virtu acquisition (see Note 2) . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . Balance at December 31, 2009 . . . . . . . . . . . . . . . Switch and Data acquisition (see Note 2) . . . Impact of foreign currency exchange . . . . . . North America $ — — — — 408,730 — Europe Asia-Pacific Total $324,674 4,232 33,663 362,569 — (17,083) $18,155 — 326 18,481 — 1,668 $342,829 4,232 33,989 381,050 408,730 (15,415) Balance at December 31, 2010 . . . . . . . . . . . . . . . $408,730 $345,486 $20,149 $774,365 The Company’s goodwill and intangible assets in Europe, denominated in British pounds and Euros, goodwill in Asia-Pacific, denominated in Singapore dollars, and certain intangible assets in North America, denominated in Canadian dollars, are subject to foreign currency fluctuations. The Company’s foreign currency translation gains and losses, including goodwill and other intangibles, are a component of other comprehensive income and loss. F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Changes in the gross book value of intangible assets by geographic regions are as follows (in thousands): Intangible assets, gross at December 31, 2008 . . . . Other intangibles . . . . . . . . . . . . . . . . . . . . . . . Impact of foreign currency exchange . . . . . . . Intangible assets, gross at December 31, 2009 . . . . Switch and Data acquisition (see Note 2) . . . . Impact of foreign currency exchange . . . . . . . North America $ 1,428 865 — 2,293 115,970 176 Europe Asia-Pacific Total $57,390 — 5,618 63,008 — (3,058) $— — — — — — $ 58,818 865 5,618 65,301 115,970 (2,882) Intangible assets, gross at December 31, 2010 . . . . $118,439 $59,950 $— $178,389 For the years ended December 31, 2010, 2009 and 2008, the Company recorded amortization expense of $13,632,000, $5,555,000 and $6,868,000, respectively, associated with its other intangible assets. Estimated future amortization expense related to these intangibles is as follows (in thousands): Year ending: 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,683 16,537 16,489 16,236 15,826 69,174 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,945 Other Assets Other assets consisted of the following as of December 31 (in thousands): Debt issuance costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 2009 $34,066 24,604 9,597 4,309 1,361 $19,762 28,032 3,247 3,021 1,047 $73,937 $55,109 F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Accounts Payable and Accrued Expenses Accounts payable and accrued expenses consisted of the following as of December 31 (in thousands): 2010 2009 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued utilities and security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,585 53,259 25,456 18,346 15,707 3,786 2,894 13,821 $14,874 35,809 6,235 13,526 14,508 4,657 2,713 6,731 $145,854 $99,053 Other Current Liabilities Other current liabilities consisted of the following as of December 31 (in thousands): 2010 2009 Deferred installation revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred recurring revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,149 12,624 3,089 2,349 993 585 445 1,394 $26,319 8,406 2,043 2,689 814 403 — 492 Other Liabilities Other liabilities consisted of the following as of December 31 (in thousands): $52,628 $41,166 2010 2009 Asset retirement obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred rent, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred installation revenue, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred recurring revenue, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer deposits, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap payable, non-current Accrued restructuring charges, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46,322 43,705 19,488 4,897 4,206 — 3,952 2,473 $17,710 34,288 18,228 5,160 5,813 8,496 3,876 1,095 $125,043 $94,666 The Company currently leases the majority of its IBX data centers and certain equipment under non-cancelable operating lease agreements expiring through 2035. The IBX data center lease agreements F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated some rent expense abatement periods for certain leases to better match the phased build-out of its centers. The Company accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent. 5. Derivative and Hedging Instruments The Company employed interest rate swaps to partially offset its exposure to variability in interest payments due to fluctuations in interest rates for certain of its variable-rate debt. As of December 31, 2010, the Company had no outstanding interest rate swaps. The Company employs foreign currency forward contracts to partially offset its business exposure to foreign exchange risk for certain existing foreign currency-denominated assets and liabilities. Cash Flow Hedges—Interest Rate Swaps During the year ended December 31, 2010, the Company prepaid and terminated the Chicago IBX Financing and the European Financing (see Note 7) and the associated interest rate swaps. As of December 31, 2009, the Company had a total of four outstanding interest rate swap instruments with expiration dates ranging from February 2011 to May 2011 as follows (in thousands): Notional Amount Fair Value (1) Accumulated Loss (2) Liabilities: European Financing interest rate swaps . . . . . . . Chicago IBX Financing interest rate swap . . . . . $ 89,065 105,000 $(5,117) (3,379) $(5,023) (3,379) $194,065 $(8,496) $(8,402) (1) (2) Included in the consolidated balance sheets within other liabilities. Included in the consolidated balance sheets within accumulated other comprehensive income (loss). As of December 31, 2009, the Company designated its interest rate swaps as highly effective hedge relationships at achieving offsetting changes in cash flows with an insignificant amount of ineffectiveness recorded in interest expense on the accompanying consolidated statements of operations. Other Derivatives–Foreign Currency Forward Contracts The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of the foreign currency-denominated assets and liabilities change. Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. The Company has not designated the foreign currency forward contracts as hedging instruments under the accounting standard for derivatives and hedging. Gains and losses on these contracts are included in other income (expense), net, along with those foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward contracts. The Company entered into various F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. foreign currency forward contracts during the years ended December 31, 2010 and 2009. As of December 31, 2010, the Company had gross assets totaling $138,000 and gross liabilities totaling $196,000 representing the fair values of these foreign currency forward contracts. As of December 31, 2010, the Company’s foreign currency forward contracts, net, by counter party, were included within other current liabilities. As of December 31, 2009, the Company had gross assets totaling $504,000 and gross liabilities totaling $6,000 representing the fair values of these foreign currency forward contracts. As of December 31, 2009, the Company’s foreign currency forward contracts, net, by counter party, were included within other current assets. The following table sets forth the Company’s net gain (loss), which is reflected in other income (expense) on the accompanying consolidated statement of operations, in connection with its foreign currency forward contracts for the years ended December 31 (in thousands): Net gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(69) $365 $7,835 2010 2009 2008 6. Fair Value Measurements The Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2010 were as follows (in thousands): Fair value at December 31, 2010 Fair value measurement using Level 1 Level 2 Level 3 Assets: U.S. government and agency obligations . . . . . . . . . . . . . . . . . Cash and money markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency forward contracts (1) . . . . . . . . . . . . . . . . . . $391,957 195,860 2,645 2,377 138 $ — $391,957 195,860 — — — — $— — 2,645 — 2,377 — 138 — Liabilities: Foreign currency forward contracts (1) . . . . . . . . . . . . . . . . . . $592,977 $195,860 $397,117 $— $ $ 196 196 $ — $ $ — $ 196 196 $— $— (1) Represents gross fair value. Total fair value, net is included within other current liabilities in the Company’s accompanying consolidated balance sheets. F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2009 were as follows (in thousands): Assets: U.S. government and agency obligations . . . . . . . . . . . . . . . . . Cash and money markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency forward contracts (1) . . . . . . . . . . . . . . . . . . Fair value at December 31, 2009 Fair value measurement using Level 1 Level 2 Level 3 $437,923 147,059 12,603 5,543 1,109 504 $ — $437,923 147,059 — — — — — $— — 12,603 — 5,543 — 1,109 — 504 — $604,741 $147,059 $457,682 $— Liabilities: Foreign currency forward contracts (1) . . . . . . . . . . . . . . . . . . Interest rate swaps (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (6) (8,496) $ — $ — (6) $— (8,496) — $ (8,502) $ — $ (8,502) $— (1) Represents gross fair value. Total fair value, net is included within other current assets in the Company’s accompanying consolidated balance sheets. Included in the consolidated balance sheets within other liabilities. (2) The fair value of the Company’s investments in available-for-sale money market funds approximates their face value. Such instruments are included in cash equivalents. These instruments include available-for-sale debt investments related to the Company’s investments in the securities of other public companies, governmental units and other agencies. The fair value of these investments is based on the quoted market price of the underlying shares. The Company did not have any Level 3 financial assets during the year ended December 31, 2010. During the year ended December 31, 2010, the Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis. During the year ended December 31, 2010, there were no impairment charges recorded in the Company’s statement of operations in connection with the Company’s goodwill and long-lived assets. Valuation Methods Fair value estimates are made as of a specific point in time based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. The Company’s money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices for identical instruments in active markets. However, the Company’s investments in the Reserve experienced a decline in its fair value as a result of its exposure to investments held in Lehman Brothers which filed for Chapter 11 bankruptcy protection in September 2008. The Company recorded F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. other-than-temporary impairment losses on its investments in the Reserve and each of the individual securities which comprise the holdings in the Reserve was further evaluated. During the year ended December 31, 2008, the Company re-designated its investment in the Reserve from cash and cash equivalents to short-term investments. This re-designation was included in purchases of investments in investing activities in the Company’s accompanying consolidated statements of cash flows. The Company conducted its fair value assessment of the Reserve using Level 2 and Level 3 inputs. Management reviewed the Reserve’s underlying securities portfolio which is substantially comprised of discount notes, certificates of deposit and commercial paper issued by highly-rated institutions. Management evaluated the fair value of its unit interest in the Reserve itself, considering risk of collection, timing and other factors. These assumptions were inherently subjective and involved significant management judgment. As a result, the Company classified its holdings in the Reserve within Level 3 of the fair value hierarchy during the year ended December 31, 2009 (see Note 4, “Cash, Cash Equivalent and Short-Term and Long-Term Investments”). The Company considers each category of investments held to be an asset group. The asset groups held at December 31, 2010 and 2009 were primarily U.S. government and agency securities, cash and money market funds, corporate bonds and asset-backed securities. The Company’s fair value assessment includes an evaluation by each of these securities held for sale, all of which continue to be classified within Level 2 of the fair value hierarchy. The types of instruments valued based on other observable inputs include available-for-sale debt investments in other public companies, governmental units and other agencies. Such instruments are generally classified within Level 2 of the fair value hierarchy. Short-Term and Long-Term Investments. The Company uses the specific identification method in computing realized gains or losses. Short-term and long-term investments are classified as “available-for-sale” and are carried at fair value based on quoted market prices with unrealized gains and losses reported in stockholders’ equity as a component of other comprehensive income or loss, net of any related tax effect. The Company reviews its investment portfolio quarterly to determine if any securities may be other-than-temporarily impaired due to increased credit risk, changes in industry or sector of a certain instrument or ratings downgrades over an extended period of time. The Company determined that these quoted market prices qualify as Level 1 and Level 2. Derivative Assets and Liabilities. In determining the fair value of the Company’s interest rate swap derivatives, the Company used the present value of expected cash flows based on observable market interest rate curves and volatilities commensurate with the term of each instrument and the credit valuation adjustments to appropriately reflect both the Company’s own nonperformance risk and the counterparty’s nonperformance risk. For foreign currency derivatives, the Company’s approach is to use forward contract and option valuation models employing market observable inputs, such as spot currency rates, time value and option volatilities and adjust for the credit default swap market. The Company determined that the significant inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. 7. Debt Facilities Senior Notes In February 2010, the Company issued $750,000,000 aggregate principal amount of 8.125% Senior Notes due March 1, 2018 (the “Senior Notes”). Interest is payable semi-annually on March 1 and September 1 of each year, commencing on September 1, 2010. F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The Senior Notes are governed by an Indenture dated March 3, 2010 between the Company, as issuer, and U.S. Bank National Association, as trustee (the “Senior Notes Indenture”). The Senior Notes Indenture contains covenants that limit the Company’s ability and the ability of its subsidiaries to, among other things: • • • incur additional debt; pay dividends or make other restricted payments; purchase, redeem or retire capital stock or subordinated debt; • make asset sales; • • • • enter into transactions with affiliates; incur liens; enter into sale-leaseback transactions; provide subsidiary guarantees; • make investments; and • merge or consolidate with any other person. Each of these restrictions has a number of important qualifications and exceptions. The Senior Notes are unsecured and rank equal in right of payment to the Company’s existing or future senior debt and senior in right of payment to the Company’s existing and future subordinated debt. The Senior Notes will be effectively junior to any of the Company’s existing and future secured indebtedness and any indebtedness of its subsidiaries. At any time prior to March 1, 2013, the Company may on any one or more occasions redeem up to 35% of the aggregate principal amount of the Senior Notes outstanding under the Senior Notes Indenture, at a redemption price equal to 108.125% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest to, but not including, the redemption date, with the net cash proceeds of one or more equity offerings, provided that (i) at least 65% of the aggregate principal amount of the Senior Notes issued under the Senior Notes Indenture remains outstanding immediately after the occurrence of such redemption and (ii) the redemption must occur within 90 days of the date of the closing of such equity offerings. On or after March 1, 2014, the Company may redeem all or a part of the Senior Notes, on any one or more occasions, at the redemption prices set forth below plus accrued and unpaid interest thereon, if any, up to, but not including, the applicable redemption date, if redeemed during the one-year period beginning on March 1 of the years indicated below: 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.0625% 102.0313% 100.0000% Redemption price of the Senior Notes In addition, at any time prior to March 1, 2014, the Company may also redeem all or a part of the Senior Notes at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed plus applicable premium (the “Applicable Premium”) and accrued and unpaid interest, if any, to, but not including, the date of redemption (the “Redemption Date”). The Applicable Premium means the greater of: • • 1.0% of the principal amount of the Senior Notes; and the excess of: (a) the present value at such redemption date of (i) the redemption price of the Senior Notes at March 1, 2014 as shown in the above table, plus (ii) all required interest payments due on the F-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Senior Notes through March 1, 2014 (excluding accrued but unpaid interest, if any, to, but not including the redemption date), computed using a discount rate equal to the yield to maturity of the United States Treasury securities with a constant maturity most nearly equal to the period from the redemption date to March 1, 2014, plus 0.50%; over (b) the principal amount of the Senior Notes. Upon a change in control, the Company will be required to make an offer to purchase each holder’s Senior Notes at a purchase price equal to 101% of the principal amount thereof plus accrued and unpaid interest to the date of purchase. Debt issuance costs related to the Senior Notes, net of amortization, were $13,045,000 as of December 31, 2010. Convertible Debt The Company’s convertible debt consisted of the following as of December 31 (in thousands): 2.50% Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . 3.00% Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . 4.75% Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . $ 250,000 395,986 373,750 $ 250,000 395,986 373,750 2010 2009 Less amount representing debt discount . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,019,736 (103,399) 1,019,736 (126,030) 916,337 — 893,706 — $ 916,337 $ 893,706 2.50% Convertible Subordinated Notes In March 2007, the Company issued $250,000,000 aggregate principal amount of 2.50% Convertible Subordinated Notes due April 15, 2012 (the “2.50% Convertible Subordinated Notes”). Interest is payable semi- annually on April 15 and October 15 of each year, and commenced October 15, 2007. The 2.50% Convertible Subordinated Notes are governed by an Indenture dated as of March 30, 2007, between the Company, as issuer, and U.S. Bank National Association, as trustee (the “2.50% Convertible Subordinated Notes Indenture”). The 2.50% Convertible Subordinated Notes Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The 2.50% Convertible Subordinated Notes are unsecured and rank junior in right of payment to the Company’s existing or future senior debt and equal in right of payment to the Company’s existing and future subordinated debt. Upon conversion, holders will receive, at the Company’s election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. However, the Company may at any time irrevocably elect for the remaining term of the 2.50% Convertible Subordinated Notes to satisfy its obligation in cash up to 100% of the principal amount of the 2.50% Convertible Subordinated Notes converted, with any remaining amount to be satisfied, at the Company’s election, in shares of its common stock or a combination of cash and shares of its common stock. The initial conversion rate is 8.9259 shares of common stock per $1,000 principal amount of 2.50% Convertible Subordinated Notes, subject to adjustment. This represents an initial conversion price of F-35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. approximately $112.03 per share of common stock. Holders of the 2.50% Convertible Subordinated Notes may convert their notes at any time prior to the close of business on the business day immediately preceding the maturity date under the following circumstances: • • • • during any fiscal quarter (and only during that fiscal quarter) ending after June 30, 2007, if the sale price of the Company’s common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than 130% of the conversion price per share of common stock on such last trading day, which was $145.64 per share as of December 31, 2010 (the “Stock Price Condition Conversion Clause”); subject to certain exceptions, during the five business day period following any ten consecutive trading day period in which the trading price of the 2.50% Convertible Subordinated Notes for each day of such period was less than 98% of the product of the sale price of the Company’s common stock and the conversion rate (the “2.50% Convertible Subordinated Notes Parity Provision Clause”); if such Convertible Subordinated Notes have been called for redemption; upon the occurrence of specified corporate transactions described in the 2.50% Convertible Subordinated Notes Indenture, such as a consolidation, merger or binding share exchange in which the Company’s common stock would be converted into cash or property other than securities (the “Corporate Action Provision Clause”); or • at any time on or after March 15, 2012. Upon conversion, due to the conversion formulas associated with the 2.50% Convertible Subordinated Notes, if the Company’s stock is trading at levels exceeding 130% of the conversion price per share of common stock, and if the Company elects to pay any portion of the consideration in cash, additional consideration beyond the $250,000,000 of gross proceeds received would be required. However, in no event would the total number of shares issuable upon conversion of the 2.50% Convertible Subordinated Notes exceed 11.6036 per $1,000 principal amount of Convertible Subordinated Notes, subject to anti-dilution adjustments, or the equivalent of $86.18 per share of common stock or a total of 2,900,900 shares of the Company’s common stock. As of December 31, 2010, the 2.50% Convertible Subordinated Notes were convertible into 2,231,475 shares of the Company’s common stock. The conversion rates may be adjusted upon the occurrence of certain events, including for any cash dividend, but they will not be adjusted for accrued and unpaid interest. Holders of the 2.50% Convertible Subordinated Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited. The 2.50% Convertible Subordinated Notes called for redemption may be surrendered for conversion prior to the close of business on the business day immediately preceding the redemption date. The Company may only redeem all or a portion of the 2.50% Convertible Subordinated Notes at any time after April 16, 2010 for cash but only if the closing sale price of the Company’s common stock for at least 20 of the 30 consecutive trading days immediately prior to the day the Company gives notice of redemption is greater than 130% of the applicable conversion price per share of common stock on the date of the notice, which was $145.64 per share as of December 31, 2010. The redemption price will equal 100% of the principal amount of the 2.50% Convertible Subordinated Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of redemption. Holders of the 2.50% Convertible Subordinated Notes have the right to require the Company to purchase with cash all or a portion of the 2.50% Convertible Subordinated Notes upon the occurrence of a fundamental change such as change of control at a purchase price equal to 100% of the principal amount of the 2.50% F-36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Convertible Subordinated Notes plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 2.50% Convertible Subordinated Notes in connection with such change of control in certain circumstances. The Company’s 2.50% Convertible Subordinated Notes fall within the scope of the accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) due to the Company’s ability to elect to repay the 2.50% Convertible Subordinated Notes in cash. The Company separately accounts for the liability and equity component in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods as prescribed in the FASB standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement). The Company has determined that the embedded conversion option in the 2.50% Convertible Subordinated Notes is not required to be separately accounted for as a derivative under the accounting standard for derivatives and hedging. Under the accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company separated the 2.50% Convertible Subordinated Notes into a liability component and an equity component. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 2.50% Convertible Subordinated Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification as prescribed in the accounting standard for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Issuance and transaction costs incurred at the time of the issuance of the 2.50% Convertible Subordinated Notes with third parties are allocated to the liability and equity components in proportion to the allocation of proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. The 2.50% Convertible Subordinated Notes consisted of the following as of December 31 (in thousands): Equity component (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,263 $ 52,263 Liability component : Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: debt discount, net (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,000 (15,815) $250,000 (27,057) Net carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $234,185 $222,943 2010 2009 (1) (2) Included in the consolidated balance sheets within additional paid-in capital. Included in the consolidated balance sheets within convertible debt and is amortized over the remaining life of the 2.50% Convertible Subordinated Notes. As of December 31, 2010, the remaining life of the 2.50% Convertible Subordinated Notes was 1.29 years. F-37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The following table sets forth total interest expense recognized related to the 2.50% Convertible Subordinated Notes during the year ended December 31 (in thousands): Contractual interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,250 1,236 11,242 $ 6,250 1,244 10,418 Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,728 $17,912 Effective interest rate of the liability component . . . . . . . . . . . . . . . . . . . . . . . . . 8.37% 8.37% 2010 2009 3.00% Convertible Subordinated Notes In September 2007, the Company issued $395,986,000 aggregate principal amount of 3.00% Convertible Subordinated Notes due October 15, 2014 (the “3.00% Convertible Subordinated Notes”). Interest is payable semi-annually on April 15 and October 15 of each year, and commenced April 15, 2008. The 3.00% Convertible Subordinated Notes are governed by an Indenture dated as of September 26, 2007, between the Company, as issuer, and U.S. Bank National Association, as trustee (the “3.00% Convertible Subordinated Notes Indenture”). The 3.00% Convertible Subordinated Notes Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The 3.00% Convertible Subordinated Notes are unsecured and rank junior in right of payment to the Company’s existing or future senior debt and equal in right of payment to the Company’s existing and future subordinated debt. Holders of the 3.00% Convertible Subordinated Notes may convert their notes at their option on any day up to and including the business day immediately preceding the maturity date into shares of the Company’s common stock. The base conversion rate is 7.436 shares of common stock per $1,000 principal amount of 3.00% Convertible Subordinated Notes, subject to adjustment. This represents a base conversion price of approximately $134.48 per share of common stock. If, at the time of conversion, the applicable stock price of the Company’s common stock exceeds the base conversion price, the conversion rate will be determined pursuant to a formula resulting in the receipt of up to 4.4616 additional shares of common stock per $1,000 principal amount of the 3.00% Convertible Subordinated Notes, subject to adjustment. However, in no event would the total number of shares issuable upon conversion of the 3.00% Convertible Subordinated Notes exceed 11.8976 per $1,000 principal amount of 3.00% Convertible Subordinated Notes, subject to anti-dilution adjustments, or the equivalent of $84.05 per share of the Company’s common stock or a total of 4,711,283 shares of the Company’s common stock. As of December 31, 2010, the 3.00% Convertible Subordinated Notes were convertible into 2,944,551 shares of the Company’s common stock. The conversion rates may be adjusted upon the occurrence of certain events, including for any cash dividend, but they will not be adjusted for accrued and unpaid interest. Holders of the 3.00% Convertible Subordinated Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited. The Company may not redeem the 3.00% Convertible Subordinated Notes at its option. Holders of the 3.00% Convertible Subordinated Notes have the right to require the Company to purchase with cash all or a portion of the Convertible Subordinated Notes upon the occurrence of a fundamental change such as change of control at a purchase price equal to 100% of the principal amount of the 3.00% Convertible Subordinated Notes plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase. Following F-38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 3.00% Convertible Subordinated Notes in connection with such change of control in certain circumstances. The Company has considered the accounting standard for debt with conversion and other options and for derivatives and hedging and has determined that the 3.00% Convertible Subordinated Notes do not contain a beneficial conversion feature as the fair value of the Company’s common stock on the date of issuance was less than the initial conversion price outlined in the agreement. 4.75% Convertible Subordinated Notes In June 2009, the Company issued $373,750,000 aggregate principal amount of 4.75% Convertible Subordinated Notes due June 15, 2016 (the “4.75% Convertible Subordinated Notes”). Interest is payable semi- annually on June 15 and December 15 of each year, beginning December 15, 2009. The 4.75% Convertible Subordinated Notes are governed by an Indenture dated as of June 12, 2009, between the Company, as issuer, and U.S. Bank National Association, as trustee (the “4.75% Convertible Subordinated Notes Indenture”). The 4.75% Convertible Subordinated Notes Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The 4.75% Convertible Subordinated Notes are unsecured and rank junior in right of payment to the Company’s existing or future senior debt and equal in right of payment to the Company’s existing and future subordinated debt. Upon conversion, holders will receive, at the Company’s election, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock. However, the Company may at any time irrevocably elect for the remaining term of the 4.75% Convertible Subordinated Notes to satisfy its obligation in cash up to 100% of the principal amount of the 4.75% Convertible Subordinated Notes, with any remaining amount to be satisfied, at the Company’s election, in shares of its common stock or a combination of cash and shares of its common stock. The initial conversion rate is 11.8599 shares of common stock per $1,000 principal amount of 4.75% Convertible Subordinated Notes, subject to adjustment. This represents an initial conversion price of approximately $84.32 per share of common stock. Holders of the 4.75% Convertible Subordinated Notes may convert their notes at any time prior to the close of business on the business day immediately preceding the maturity date under the following circumstances: • • • during any fiscal quarter (and only during that fiscal quarter) ending after December 31, 2009, if the sale price of the Company’s common stock, for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, is greater than 130% of the conversion price per share of common stock on such last trading day, which was $109.62 per share (the “Stock Price Condition Conversion Clause”); subject to certain exceptions, during the five business day period following any 10 consecutive trading day period in which the trading price of the 4.75% Convertible Subordinated Notes for each day of such period was less than 98% of the product of the sale price of the Company’s common stock and the conversion rate (the “4.75% Convertible Subordinated Notes Parity Provision Clause”); upon the occurrence of specified corporate transactions described in the 4.75% Convertible Subordinated Notes Indenture, such as a consolidation, merger or binding share exchange in which the Company’s common stock would be converted into cash or property other than securities (the “Corporate Action Provision Clause”); or • at any time on or after March 15, 2016. F-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Upon conversion, if the Company elected to pay a sufficiently large portion of the conversion obligation in cash, additional consideration beyond the $373,750,000 of gross proceeds received would be required. As of December 31, 2010, the 4.75% Convertible Subordinated Notes were convertible into 4,432,638 shares of the Company’s common stock. The conversion rates may be adjusted upon the occurrence of certain events, including for any cash dividend, but they will not be adjusted for accrued and unpaid interest. Holders of the 4.75% Convertible Subordinated Notes will not receive any cash payment representing accrued and unpaid interest upon conversion of a note. Accrued but unpaid interest will be deemed to be paid in full upon conversion rather than cancelled, extinguished or forfeited. The Company does not have the right to redeem the 4.75% Convertible Subordinated Notes at its option. Holders of the 4.75% Convertible Subordinated Notes have the right to require the Company to purchase with cash all or a portion of the 4.75% Convertible Subordinated Notes upon the occurrence of a fundamental change, such as a change of control at a purchase price equal to 100% of the principal amount of the 4.75% Convertible Subordinated Notes plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 4.75% Convertible Subordinated Notes in connection with such change of control in certain circumstances. Under an accounting standard for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), the Company separated the 4.75% Convertible Subordinated Notes into a liability component and an equity component. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option was determined by deducting the fair value of the liability component from the initial proceeds ascribed to the 4.75% Convertible Subordinated Notes as a whole. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification as prescribed in the accounting standard for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Issuance and transaction costs incurred at the time of the issuance of the 4.75% Convertible Subordinated Notes with third parties are allocated to the liability and equity components and accounted for as debt issuance costs and equity issuance costs, respectively. The 4.75% Convertible Subordinated Notes consisted of the following as of December 31 (in thousands): Equity component (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $104,794 $104,794 Liability component : Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: debt discount, net (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $373,750 (87,584) $373,750 (98,973) Net carrying amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $286,166 $274,777 2010 2009 (1) Included in the consolidated balance sheets within additional paid-in capital. (2) Included in the consolidated balance sheets within convertible debt and is amortized over the remaining life of the 4.75% Convertible Subordinated Notes. F-40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. As of December 31, 2010, the remaining life of the 4.75% Convertible Subordinated Notes was 5.46 years. The following table sets forth total interest expense recognized related to the 4.75% Convertible Subordinated Notes for the year ended December 31 (in thousands): Contractual interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,753 1,033 11,390 $ 9,814 573 5,820 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,176 $16,207 Effective interest rate of the liability component . . . . . . . . . . . . . . . . . . . . . . . . . 10.88% 10.88% 2010 2009 To minimize the impact of potential dilution upon conversion of the 4.75% Convertible Subordinated Notes, the Company entered into capped call transactions (“the Capped Call”) separate from the issuance of the 4.75% Convertible Subordinated Notes and paid a premium of $49,664,000 for the Capped Call. The Capped Call covers a total of approximately 4,432,638 shares of the Company’s common stock, subject to adjustment. Under the Capped Call, the Company effectively raised the conversion price of the 4.75% Convertible Subordinated Notes from $84.32 to $114.82. Depending upon the Company’s stock price at the time the 4.75% Convertible Subordinated Notes are redeemed, the Capped Call will return up to 1,177,456 shares of the Company’s common stock to the Company; however, the Company will receive no benefit from the Capped Call if the Company’s stock price is $84.32 or lower at the time of conversion and will receive less shares than the 1,177,456 share maximum as described above for share prices in excess of $114.82 at the time of conversion than it would have received at a share price of $114.82 (the Company’s benefit from the Capped Call is capped at $114.82 and the benefit received begins to decrease above this price). In connection with the Capped Call, the Company recorded a $19,000 derivative loss in its consolidated statement of operations for the year ended December 31, 2009, and the remaining $49,645,000 was recorded in additional paid-in capital pursuant to the accounting standard for derivative financial instruments indexed to, and potentially settled in, an entity’s own common stock and the accounting standard for determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Mortgage and Loans Payable The Company’s non-convertible debt consisted of the following as of December 31 (in thousands): 2010 2009 New Asia-Pacific financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . European financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chicago IBX financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Netherlands financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank of America revolving credit line . . . . . . . . . . . . . . . . . . . . . . . $120,315 — — — — — — — $ — 130,058 109,991 91,756 64,559 24,559 9,311 — Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,315 (19,978) 430,234 (58,912) $100,337 $371,322 F-41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. New Asia-Pacific Financing In May 2010, five wholly-owned subsidiaries of the Company, located in Australia, Hong Kong, Japan and Singapore, completed a new multi-currency credit facility agreement for approximately $223,636,000 (the “New Asia-Pacific Financing”), comprising 79,153,000 Australian dollars, 370,433,000 Hong Kong dollars, 99,434,000 Singapore dollars and 1,513,400,000 Japanese yen. The New Asia-Pacific Financing replaced the Company’s previously existing Asia-Pacific Financing and Singapore Financing. The New Asia-Pacific Financing has a five- year term with semi-annual principal payments and quarterly debt service and consists of two tranches: (i) Tranche A totaling approximately $90,810,000 was available for immediate drawing upon satisfaction of certain conditions precedent and was used to refinance the existing Asia-Pacific Financing and Singapore Financing and (ii) Tranche B totaling approximately $132,826,000 is available for drawing in Australian, Hong Kong and Singapore dollars only for up to 24 months following the effective date of the New Asia-Pacific Financing. The New Asia Pacific Financing bears an interest rate of 3.50% above the local borrowing rates for the first 12 months and interest rates between 2.50%-3.50% above the local borrowing rates thereafter, depending on the leverage ratio within these five subsidiaries of the Company. The New Asia-Pacific Financing contains four financial covenants, which the Company and its five subsidiaries must comply with quarterly, consisting of two leverage ratios, an interest coverage ratio and a debt service ratio. The New Asia-Pacific Financing is guaranteed by the parent, Equinix, Inc., and is secured by most of the Company’s five subsidiaries’ assets and share pledges. During the year ended December 31, 2010, the Company’s five subsidiaries used part of the proceeds from Tranche A and Tranche B under the New Asia-Pacific Financing for the prepayment and termination of the existing Asia-Pacific Financing and the Singapore Financing. As of December 31, 2010, the Company’s five subsidiaries had fully utilized Tranche A and utilized approximately $40,402,000 of Tranche B under the New Asia-Pacific Financing. The loans payable under the New Asia-Pacific Financing have a final maturity date of March 2015. As of December 31, 2010, the Company and its five subsidiaries were in compliance with all financial covenants in connection with the New Asia-Pacific Financing. As of December 31, 2010, $120,315,000 was outstanding under the New Asia-Pacific Financing at an approximate blended interest rate of 4.86% per annum. Debt issuance costs associated with the New Asia-Pacific Financing, net of amortization, were $8,027,000 as of December 31, 2010. Debt issuance costs associated with the previously-existing Asia-Pacific Financing and the Singapore Financing were written-off and recorded as losses on debt extinguishment (refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below). European Financing In September 2007, as a result of the IXEurope Acquisition (see Note 2), a wholly-owned subsidiary of the Company acquired a senior facilities agreement totaling approximately 82,000,000 British pounds, or approximately $132,600,000 (the “European Financing”). The European Financing was comprised of three facilities: (i) Facility A, which was available to draw upon through March 2008, provided for a term loan of up to approximately 40,000,000 British pounds and bore a floating interest rate per annum of between 0.875% and 2.25% above LIBOR or EURIBOR; (ii) Facility B, which was available to draw upon through June 2010, provided for a term loan of up to approximately 40,000,000 British pounds and bore a floating interest rate per annum of between 0.875% and 2.25% above LIBOR or EURIBOR and (iii) Facility C, which was available to draw upon through May 2014, provided for a revolving credit facility of up to approximately 2,000,000 British pounds and bore a floating interest rate per annum of between 0.875% and 2.125% above LIBOR or EURIBOR (collectively, the “Loans Payable”). The European Financing had a final maturity date of June 30, 2014 and interest was payable in periods of one, two, three or six months at the election of the Company. Facility A was repaid in 13 semi-annual installments which commenced June 30, 2008. Facility B was repaid in nine semi- annual installments which commenced June 30, 2010. Facility C was repaid at the final maturity date. The F-42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. European Financing was available to fund the Company’s operations in Europe, including capital expenditures, for certain subsidiaries in Europe and amounts could be drawn in British pounds, Euros or Swiss francs. Loans payable under the European Financing were available to fund certain of the Company’s expansion projects in France, Germany, Switzerland and the United Kingdom. Under the European Financing, the use of cash available in these certain European subsidiaries was limited to the general working capital needs of these subsidiaries or repaying the European Financing. The European Financing was collateralized by certain of the Company’s assets in Europe and contained several financial covenants specific to the Company’s European operations. The European Financing required the Company to hedge the floating interest rates inherent in the European Financing (on just a portion of the total amounts outstanding). In May 2008, the Company entered into three interest rate swap agreements to hedge the interest payments on the equivalent principal of $89,065,000 of the European Financing, which would mature in May 2011. Under the terms of the interest rate swap transactions, the Company received interest payments based on rolling one-month EURIBOR and LIBOR terms and paid fixed interest rates ranging from 5.59% to 7.03% (swap rates ranging from 4.46% to 5.91% plus borrowing margin). In April 2010, the Company prepaid and terminated the European Financing at par for a total payment of approximately $121,748,000 plus accrued and unpaid interest. On the same date, the Company terminated three interest rate swaps associated with the European Financing and paid a total of $4,272,000 to terminate these interest rate swaps. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below. Chicago IBX Financing In February 2007, the Company obtained a loan of up to $110,000,000 to finance up to 60% of the development and construction costs of an expansion project in the Chicago metro area (the “Chicago IBX Financing”). The Company periodically received advances of funds in conjunction with costs incurred for construction of its expansion project in the Chicago metro area (collectively, the “Loan Payable”). The Loan Payable had an initial maturity date of January 31, 2010, with options to extend for up to an additional two years, in one-year increments, upon satisfaction of certain extension conditions. In January 2010, the Company utilized one of the options to extend the Loan Payable under the Chicago IBX Financing for one year, which now was set to expire on January 31, 2011. The Loan Payable bore interest at a floating rate (one, three or six month LIBOR plus 2.75%) with interest payable monthly, which commenced in March 2007. The Chicago IBX Financing had no specific financial covenants and contained a limited parent company guaranty. In May 2008, the Company entered into an interest rate swap agreement with one counterparty to hedge the interest payments on principal of $105,000,000 of the Chicago IBX Financing, which would mature in February 2011. Under the terms of the interest rate swap transaction, we received interest payments based on rolling one-month LIBOR terms and pay fixed interest rate of 6.34% (swap rate of 3.59% plus borrowing margin of 2.75%) (see Note 6). In March 2010, the Company prepaid and terminated the Chicago IBX Financing, of which principal of $109,991,000 was outstanding. The Chicago IBX Financing was prepaid to the lender for an amount equal to 95.909% of the then outstanding principal balance, plus accrued and unpaid interest, resulting in a gain of $4,460,000. On the same date, the Company paid and terminated the interest rate swap associated with the Chicago IBX Financing totaling $3,160,000. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below. F-43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Mortgage Payable In December 2005, the Company financed the Ashburn Campus Property Acquisition with a $60,000,000, 8% mortgage to be amortized over 20 years (the “Mortgage Payable”). Payments for the Mortgage Payable were payable monthly, commencing February 2006, and would be payable through January 2026. The Mortgage Payable was collateralized by the Ashburn Campus property and related assets. Pursuant to the terms of the Mortgage Payable, the Company agreed to invest at least $40,000,000 in capital improvements to the Ashburn Campus by December 31, 2007. In December 2006, the Company obtained additional financing of $40,000,000, which increased the total amount financed by the Mortgage Payable from $60,000,000 to $100,000,000, on the same terms as the initial Mortgage Payable. The Company used this additional funding to finance expansion projects in the Washington, D.C. metro area. The Mortgage Payable had numerous covenants; however, there were no specific financial ratios or minimum operating performance covenants. In December 2010, the Company prepaid and terminated the Mortgage Payable, of which principal of $88,930,000 was outstanding. The Mortgage Payable was prepaid to the lender for an amount equal to 105.0% of then outstanding principal balance, plus accrued and unpaid interest, resulting in a loss of $4,448,000. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below. Asia-Pacific Financing In August 2007, two wholly-owned subsidiaries of the Company, located in Singapore and Tokyo, Japan, entered into an approximately $47,900,000 multi-currency credit facility agreement (the “Asia-Pacific Financing”), which is comprised of 23,000,000 Singapore dollars and 2,932,500,000 Japanese yen, respectively. During the year ended December 31, 2008, the Asia-Pacific Financing was amended to also enable our subsidiaries in Australia and Hong Kong to borrow up to 32,000,000 Australian dollars and 156,000,000 Hong Kong dollars, respectively, under the same general terms, amending the Asia-Pacific Financing into an approximately $96,700,000 multi-currency credit facility agreement. The Asia-Pacific Financing had a four-year term that allows these four subsidiaries to borrow up to their credit limits during the first 12-month period with repayment to occur over the remaining three years in twelve 12 quarterly installments (collectively, the “Loans Payable”). The Asia-Pacific Financing bore interest at a floating rate (the relevant three-month local cost of funds), as applicable, plus 1.85%-2.50% depending on the ratio of the Company’s senior indebtedness to its earnings before interest, taxes, depreciation and amortization, or EBITDA, with interest payable quarterly. Loans Payable under the Asia-Pacific Financing had a final maturity date of March 2012. The Asia-Pacific Financing might be used by these four subsidiaries to fund capital expenditures on leasehold improvements, equipment, and other installation costs related to expansion plans in Singapore, Tokyo, Sydney and Hong Kong. The Asia-Pacific Financing was guaranteed by the parent, Equinix, Inc., was secured by the assets of these four subsidiaries, including a pledge of their shares, and had several financial covenants specific to the Company’s Asia-Pacific operations. In May 2010, the Asia-Pacific Financing was terminated and replaced by the New Asia-Pacific Financing (see the above “New Asia-Pacific Financing”). Singapore Financing In September 2009, the Company’s wholly-owned subsidiary in Singapore entered into a 37,000,000 Singapore dollar, or approximately $26,338,000, credit facility agreement (the “Singapore Financing”). The Singapore Financing was comprised of two tranches: (i) Facility A, which was available for drawing upon through March 18, 2010, provided a term loan of up to 34,500,000 Singapore dollars and (ii) Facility B, which was available for drawing upon through September 12, 2010, provided a term loan of up to 2,500,000 Singapore dollars. Facility A would be repaid in nine semi-annual installments beginning August 2010 and Facility B would be repaid in eight semi-annual installments beginning February 2011 (collectively, the “Loan Payable”). The Loan Payable under the Singapore Financing bore interest at a floating rate (Swap offer rate plus 3.65% per F-44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. annum). The Singapore Financing had a final maturity date of August 31, 2014 and interest was payable in periods of one, three or six months at the election of the Company’s Singaporean subsidiary. The Singapore Financing was guaranteed by the parent, Equinix, and was secured by the assets of the Company’s second IBX data center in Singapore. The Singapore Financing had several financial covenants specific to the Company’s operations in Singapore. In May 2010, the Singapore Financing was terminated and replaced by the New Asia- Pacific Financing (see the above “New Asia-Pacific Financing”). Netherlands Financing In February 2008, as a result of the Virtu Acquisition, a wholly-owned subsidiary of the Company assumed senior credit facilities totaling approximately 5,500,000 Euros (the “Netherlands Financing”), which were callable by the lender and bore interest at a floating rate (three month EURIBOR plus 1.25%). In June 2009, the Company’s wholly-owned subsidiary in the Netherlands amended the Netherlands Financing by entering into a 7,000,000 Euro term loan to replace the previously outstanding senior credit facilities. The Netherlands Financing contained several financial covenants, was guaranteed by the Company and was collateralized by substantially all of the Company’s operations in the Netherlands (collectively, the “Loan Payable”). The Netherlands Financing had a final maturity date of June 30, 2016 with repayment to occur over the remaining seven years in 28 equal quarterly installments, which commenced in September 2009. The Loan Payable under the Netherlands Financing bore interest at a floating rate (three month EURIBOR plus 3.60% per annum). In June 2010, the Company prepaid and terminated the Netherlands Financing at par for a total payment of approximately $7,965,000 plus accrued and unpaid interest. Bank of America Revolving Credit Line In February 2009, the Company and one of its wholly-owned subsidiaries, as co-borrower, entered into a $25,000,000 one-year revolving credit facility with Bank of America (the “Bank of America Revolving Credit Line”). In February 2011, the Company amended the Bank of America Revolving Credit Line and extended the maturity date to February 2012. The Bank of America Revolving Credit Line is used primarily as a letter of credit issuing facility and to fund the Company’s working capital if so needed. The effect of issuing letters of credit under the Bank of America Revolving Credit Line reduces the amount available for borrowing under the Bank of America Revolving Credit Line. The Company may borrow, repay and reborrow under the Bank of America Revolving Credit Line at either the prime rate or at a borrowing margin of 2.75% over one, three or six month LIBOR, subject to a minimum borrowing cost of 3.00%. The Bank of America Revolving Credit Line contains three financial covenants, which the Company must comply with quarterly, consisting of a tangible net worth ratio, a debt service ratio and a senior leverage ratio and is unsecured. As of December 31, 2010, the Company was in compliance with all financial covenants in connection with the Bank of America Revolving Credit Line. The Bank of America Revolving Credit Line is available for renewal subject to mutual agreement by both parties. As of December 31, 2010, the Company had issued 13 irrevocable letters of credit totaling $18,330,000 under the Bank of America Revolving Credit Line. As a result, the amount available to borrow was $6,670,000 as of December 31, 2010. Switch and Data Debt In May 2010, the Company prepaid and terminated at par a term loan and revolving credit facility assumed in connection with the Switch and Data Acquisition for a total payment of $138,938,000 plus accrued and unpaid interest. On the same date, the Company terminated the associated interest rate swap acquired related to this credit facility for a total payment of $9,789,000. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below. F-45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. In May 2010, the Company prepaid and terminated an equipment capital lease assumed in connection with the Switch and Data Acquisition for a total payment of $9,191,000, resulting in a loss of $36,000. For additional information, refer to “Loss on Debt Extinguishment and Interest Rate Swaps, Net” below. Loss on Debt Extinguishment and Interest Rate Swaps, Net Loss on debt extinguishment and interest rate swaps, net for the year ended December 31, 2010 consisted of the following (in thousands): Principal discount on the Chicago IBX financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal premium on the mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Principal premium on the Switch and Data equipment capital lease . . . . . . . . . . . . . . . . . . . Write-off of unamortized debt issuance costs: $ 4,460 (4,448) (36) Chicago IBX financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (474) (720) (502) (908) Subtotal – loss on debt extinguishment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,628) Termination of interest rate swaps: Chicago IBX financing interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . European financing interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Switch and Data interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap termination fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal – loss on interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,160) (4,272) (83) (44) (7,559) Loss on debt extinguishment and interest rate swaps, net . . . . . . . . . . . . . . . $(10,187) 8. Capital Lease and Other Financing Obligations Capital lease and other financing obligations consisted of the following as of December 31 (in thousands): Paris 3 IBX capital lease (see Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Los Angeles IBX financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Washington, D.C. metro area IBX capital lease . . . . . . . . . . . . . . . . . . . . . . . . U.S. headquarters capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Jersey capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . London IBX financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sunnyvale capital lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . San Jose IBX equipment & fiber financing . . . . . . . . . . . . . . . . . . . . . . . . . . . Zurich IBX financing (see Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sydney 3 IBX financing (see Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other capital lease and financing obligations . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 2009 $ 58,296 36,914 28,497 25,197 24,161 15,917 15,268 13,176 12,574 11,053 20,880 $ 40,597 37,363 30,119 — — 14,003 — 13,723 11,470 — 13,754 261,933 (7,988) 161,029 (6,452) $253,945 $154,577 F-46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Los Angeles IBX Financing In December 2005, the Company recorded the Los Angeles IBX Financing. Monthly payments under the Los Angeles IBX Financing commenced in January 2006 and will be made through December 2025 at an effective interest rate of 7.75% per annum. Washington, D.C. Metro Area IBX Capital Lease In November 2004, the Company recorded the Washington, D.C. Metro Area IBX Capital Lease. Monthly payments under the Washington, D.C. Metro Area IBX Capital Lease commenced in November 2004 and will be made through October 2019 at an effective interest rate of 8.50% per annum. U.S. Headquarters Capital Lease In May 2010, the Company entered into a lease for a building for the Company’s new headquarters, which is located at One Lagoon Drive, Redwood City, California (the “U.S. Headquarters Capital Lease”). The Company took possession of this property in July 2010. Monthly payments under the U.S. Headquarters Capital Lease commenced in October 2010 and will be made through September 2030 at an effective interest rate of 7.61%. New Jersey Capital Lease In April 2010, the Company assumed a New Jersey capital lease in connection with the Switch and Data Acquisition related to a property in North Bergen, New Jersey (the “New Jersey Capital Lease”). The New Jersey Capital Lease is payable monthly and will be made through July 2023 at an effective interest rate of 8.6% per annum. London IBX Financing In October 2008, the Company recorded the London IBX Financing. Monthly payments under the London IBX Financing commenced in January 2011 and will be made through January 2030 at an effective interest rate of 11.96% per annum. Sunnyvale Capital Lease In April 2010, the Company assumed a Sunnyvale capital lease in connection with the Switch and Data Acquisition related to a property in Sunnyvale, California (the “Sunnyvale Capital Lease”). The Sunnyvale Capital Lease is payable monthly and will be made through July 2022 at an effective interest rate of 8.6% per annum. San Jose IBX Equipment & Fiber Financing In February 2005, the Company recorded the San Jose IBX Equipment & Fiber Financing. Monthly payments under the San Jose IBX Equipment & Fiber Financing commenced in February 2005 and will be made through May 2020 at an effective interest rate of 8.50% per annum. Other Capital Lease and Financing Obligations The Company has numerous other capital lease and financing obligations with maturity dates ranging from 2011 to 2022 with a weighted-average effective interest rate of 7.63%. F-47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. 9. Debt Maturities Combined aggregate maturities for the Company’s various debt facilities and other financing obligations as of December 31, 2010 were as follows (in thousands) (unaudited): Convertible debt (1) Senior notes (1) Mortgage and loans payable (1) Capital lease and other financing obligations (2) 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter $ — $ — $ 19,978 24,827 — 31,493 — 28,974 — 15,043 — — 750,000 250,000 — 395,986 — 373,750 $ 27,959 28,435 28,948 29,660 30,431 237,711 Total $ 47,937 303,262 60,441 454,620 45,474 1,361,461 Less amount representing interest . . . . . . . . . . . Less amount representing debt discount . . . . . . Plus amount representing residual property 1,019,736 — (103,399) value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 750,000 120,315 — — — — — — Less current portion of principal . . . . . . . . . . . . 916,337 — 750,000 — 120,315 (19,978) 383,144 (200,905) — 2,273,195 (200,905) (103,399) 79,694 261,933 (7,988) 79,694 2,048,585 (27,966) $ 916,337 $750,000 $100,337 $ 253,945 $2,020,619 (1) Represents principal only. (2) Represents principal and interest in accordance with minimum lease payments. 10. Stockholders’ Equity The Company’s authorized share capital is 300,000,000 shares of common stock and 100,000,000 shares of preferred stock, of which 25,000,000 is designated Series A, 25,000,000 is designated as Series A-1 and 50,000,000 is undesignated. As of December 31, 2010 and 2009, the Company had no preferred stock issued and outstanding. Common Stock As of December 31, 2010, the Company has reserved the following shares of authorized but unissued shares of common stock for future issuance: Conversion of 2.50% Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion of 3.00% Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion of 4.75% Convertible Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock options and restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock employee purchase plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,900,900 4,711,283 4,432,638 10,628,279 2,561,368 25,234,468 F-48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Other Comprehensive Income (Loss) The components of the Company’s accumulated other comprehensive loss consisted of the following as of December 31 (in thousands): Foreign currency translation loss, net of tax of $151 and $1,485 . . . . . . . . . . Unrealized loss on interest rate swaps, net of tax of $0 and $3,469 . . . . . . . . . Unrealized gain on available for sale securities, net of tax of $58 and $203 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 2009 $(112,096) — 78 $(92,594) (4,933) 289 $(112,018) $(97,238) 11. Stock-Based Compensation Switch and Data Acquisition In April 2010, as a result of the Switch and Data Acquisition, the Company issued 476,943 options to purchase the Company’s common shares and 98,509 restricted stock units of the Company’s common shares to Switch and Data employees in exchange for their outstanding options to purchase shares of and restricted stock units of Switch and Data (see Note 2, “Switch and Data Acquisition”). An aggregate fair value of approximately $35,395,000 was attributed to these equity awards, of which $16,508,000 was included as part of the consideration of the Switch and Data Acquisition and the remaining $18,887,000 is expected to be amortized to stock-based compensation expense over a weighted-average period of 2.14 years. Equity Compensation Plans In May 2000, the Company’s stockholders approved the adoption of the 2000 Equity Incentive Plan as the successor plan to the 1998 Stock Plan. Beginning in August 2000, the Company no longer issued additional grants under the 1998 Stock Plan, and unexercised options under the 1998 Stock Plan that cancel due to an optionee’s termination may be reissued under the successor 2000 Equity Incentive Plan. Under the 2000 Equity Incentive Plan, nonstatutory stock options, restricted shares, restricted stock units, and stock appreciation rights may be granted to employees, outside directors and consultants at not less than 85% of the fair value on the date of grant, and incentive stock options may be granted to employees at not less than 100% of the fair value on the date of grant. Options granted prior to October 1, 2005 generally expire 10 years from the grant date, and equity awards granted to employees and consultants on or after October 1, 2005 will generally expire seven years from the grant date, subject to continuous service of the optionee. Equity awards granted under the 2000 Equity Incentive Plan generally vest over four years. As of December 31, 2010, the Company had reserved a total of 16,807,926 shares for issuance under the 2000 Equity Incentive Plan of which 6,926,444 were still available for grant. The plan reserve was increased on January 1 each year through January 1, 2010 by the lesser of 6% of the common stock then outstanding or 6,000,000 shares. The 2000 Equity Incentive Plan is administered by the Compensation Committee of the Board of Directors (the “Compensation Committee”), and the Compensation Committee may terminate or amend the plan, with approval of the stockholders as may be required by applicable law, at any time. In May 2000, the Company’s stockholders approved the adoption of the 2000 Director Option Plan, which was amended and restated effective January 1, 2003. Under the 2000 Director Option Plan, each non-employee board member who was not previously an employee of the Company will receive an automatic initial nonstatutory stock option grant, which vests in four annual installments. In addition, each non-employee board member will receive an annual non-statutory stock option grant on the date of the Company’s regular Annual F-49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Meeting of Stockholders, provided the board member will continue to serve as a director thereafter. Such annual option grants shall vest in full on the earlier of a) the first anniversary of the grant, or b) the date of the regular Annual Meeting of Stockholders held in the year following the grant date. A new director who receives an initial option will not receive an annual option in the same calendar year. Options granted under the 2000 Director Option Plan will have an option price not less than 100% of the fair value on the date of grant and will have a 10-year contractual term, subject to continuous service of the board member. On December 18, 2008, the Company’s Board of Directors passed resolutions eliminating all automatic stock option grant mechanisms under the 2000 Director Plan, and replaced them with an automatic restricted stock unit grant mechanism under the 2000 Equity Incentive Plan. As of December 31, 2010, the Company had reserved 593,440 shares subject to options for issuance under the 2000 Director Option Plan of which 505,938 were still available for grant. An additional 50,000 shares was added to the reserve on January 1 each year through January 1, 2010. The 2000 Director Option Plan is administered by the Compensation Committee and the Compensation Committee may terminate or amend the plan, with approval of the stockholders as may be required by applicable law, at any time. In September 2001, the Company adopted the 2001 Supplemental Stock Plan, under which non-statutory stock options and restricted shares/restricted stock units may be granted to consultants and employees who are not executive officers or board members, at not less than 85% of the fair value on the date of grant. Options granted prior to October 1, 2005 generally expire 10 years from the grant date, and options granted on or after October 1, 2005 will generally expire seven years from the grant date, subject to continuous service of the optionee. Current stock options granted under the 2001 Supplemental Stock Plan generally vest over four years. As of December 31, 2010, the Company had reserved a total of 1,493,961 shares for issuance under the 2001 Supplemental Stock Plan, of which 260,189 were still available for grant. The 2001 Supplemental Stock Plan is administered by the Compensation Committee, and the plan will continue in effect indefinitely unless the Compensation Committee decides to terminate it earlier. On April 30, 2010, in connection with the Company’s merger with Switch and Data Facilities Co., Inc., the Company assumed the outstanding equity awards under the Switch and Data 2007 Stock Incentive Plan, consisting of 476,943 stock options and 98,509 restricted stock units. The 1998 Stock Plan, 2000 Equity Incentive Plan, 2000 Director Option Plan, 2001 Supplemental Stock Plan and `Switch and Data 2007 Stock Incentive Plan are collectively referred to as the “Equity Compensation Plans.” F-50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Stock Options Stock option activity under the Equity Compensation Plans is summarized as follows: Stock options outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . Stock options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . Stock options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options outstanding at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . Stock options granted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of shares outstanding 3,130,918 88,600 (519,987) (142,078) 2,557,453 — (621,628) (64,854) 1,870,971 476,943 (610,896) (267,652) Stock options outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . 1,469,366 Weighted- average exercise price per share $ 59.06 81.60 38.30 74.89 63.18 — 48.89 97.58 66.74 55.98 49.31 109.18 62.77 (1) Stock options issued in connection with the Switch and Data Acquistion (see “Switch and Data Acquisition” above). The following table summarizes information about outstanding stock options as of December 31, 2010: Range of exercise prices $0.06 to $30.02 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30.24 to $41.93 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41.94 to $49.67 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50.67 to $52.85 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53.09 to $74.91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75.38 to $75.38 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $78.12 to $88.02 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88.39 to $98.19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $99.67 to $194.00 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding Weighted- average remaining contractual life 2.47 4.72 3.38 2.01 4.27 2.96 4.42 4.53 2.15 3.44 Exercisable Weighted- average exercise price $ 20.86 36.26 45.17 52.80 62.09 75.38 85.84 95.09 110.82 Number of shares 164,528 109,618 151,139 218,600 111,660 192,615 158,762 127,416 69,632 Weighted- average exercise price $ 20.86 38.57 45.17 52.80 61.81 75.38 85.57 95.01 111.30 62.77 1,303,970 62.04 Number of shares 164,528 151,639 151,622 218,600 153,558 200,379 194,427 153,842 80,771 1,469,366 The weighted-average exercise price of options outstanding at December 31, 2010, 2009 and 2008 was $62.77, $66.74 and $63.18, respectively. The weighted-average exercise price of options exercisable at December 31, 2010, 2009 and 2008 was $62.04, $63.87 and $58.66, respectively. F-51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The Company provides the following additional disclosures for stock options as of December 31 (dollars in thousands): Total fair value of stock options vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total aggregate intrinsic value of stock options exercised (1) . . . . . . . . . . . . . . . . . Total aggregate intrinsic value of stock options outstanding (2) . . . . . . . . . . . . . . . Total aggregate intrinsic value of stock options exercisable (2) . . . . . . . . . . . . . . . Weighted-average remaining contractual life of stock options outstanding (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average remaining contractual life of stock options exercisable (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 2009 2008 $15,456 29,379 32,620 29,638 $19,066 23,701 80,104 71,783 $27,076 24,335 17,683 16,506 3.44 3.14 3.96 3.87 4.90 4.69 (1) The intrinsic value is calculated as the difference between the market value of the stock on the date of exercise and the exercise price of the option. (2) The intrinsic value is calculated as the difference between the market value of the stock as of December 31, 2010 and the exercise price of the option. In July 2008, the Company began granting restricted stock units exclusively in lieu of stock options. Fair Value Calculations – Stock Options The Company uses the Black-Scholes option-pricing model to determine the fair value of stock options with the following weighted average assumptions for the years ended December 31: 2010 (1) 2009 2008 Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% — 37% — 0% 52% 1.11% — 3.12% 2.24 — 4.9 (1) Valuation of stock options granted in connection with the Switch and Data Acquistion (see “Switch and Data Acquisition” above). The weighted-average fair value of stock options per share on the date of grant was $53.42 and $39.22, respectively, for the years ended December 31, 2010 and 2008. F-52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Restricted Shares and Restricted Stock Units Restricted Shares Prior to 2008, the Company granted two types of restricted shares to its executive officers: 1. Unissued restricted shares at grant (2005 grant). These shares became issued and outstanding shares when they vested. The activity of these restricted shares is summarized as follows: Restricted shares outstanding, December 31, 2007 . . . . . . . . . . . . . . . . . Restricted shares issued, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares outstanding , December 31, 2008 . . . . . . . . . . . . . . . . . Restricted shares issued, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of shares outstanding 96,000 (64,000) 32,000 (32,000) Restricted shares outstanding , December 31, 2009 . . . . . . . . . . . . . . . . . — Weighted- average grant date fair value per share 43.76 43.76 43.76 43.76 — 2. Issued and outstanding restricted shares at grant (2006 and 2007 grants). At the date of the grant, the Company issued these shares into restricted book-entry escrow accounts under the names of each of the executive officers. These shares have voting rights and are considered issued and outstanding. They are released from the escrow account as they vest. However, they are subject to forfeiture (and, therefore, canceled) if the individual officers do not meet the vesting requirements. The activity of these restricted shares is as follows: Restricted shares outstanding, December 31, 2007 . . . . . . . . . . . . . . . . . Restricted shares granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares released, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares outstanding, December 31, 2008 . . . . . . . . . . . . . . . . . Restricted shares granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares released, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares outstanding, December 31, 2009 . . . . . . . . . . . . . . . . . Restricted shares granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares released, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of shares outstanding 457,245 — (153,169) (21,166) 282,910 — (137,535) (28,875) 116,500 — (85,166) — Restricted shares outstanding, December 31, 2010 . . . . . . . . . . . . . 31,334 Weighted- average grant date fair value per share $62.09 — 63.09 77.11 60.42 — 55.40 61.49 66.09 — 65.54 — 72.30 F-53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Restricted Stock Units During the past several years, the Company primarily grants restricted stock units to its employees, including executives and non-employee directors, in lieu of stock options. The Company grants restricted stock units that have a service condition only or have both a service and performance condition. Each unit is not considered issued and outstanding and does not have voting rights until it is converted into one share of the Company’s common stock upon vesting. Restricted stock unit activity is summarized as follows: Restricted stock units outstanding at December 31, 2007 . . . . . . . . . . . . . . . . Restricted stock units granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units released, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units outstanding at December 31, 2008 . . . . . . . . . . . . . . . . Restricted stock units granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units released, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units outstanding at December 31, 2009 . . . . . . . . . . . . . . . . Restricted stock units granted (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units released, vested . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted stock units canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of shares outstanding 316,402 606,737 (170,309) (53,875) 698,955 884,318 (308,459) (51,262) 1,223,552 948,442 (574,918) (130,734) Restricted stock units outstanding at December 31, 2010 . . . . . . . . . . . . . . . . 1,466,342 Weighted- average grant date fair value per share $77.79 76.37 80.38 84.14 75.46 55.96 72.85 71.83 62.18 98.24 68.70 87.67 80.68 (1) Includes 98,509 restricted stock units issued in connection with the Switch and Data Acquisition (see “Switch and Data Acquisition” above). The Company provides the following additional disclosures for restricted shares and restricted stock units as of December 31 (dollars in thousands): Total aggregate intrinsic value of restricted stock units outstanding (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $119,155 $129,880 $37,177 Weighted average remaining contractual life of restricted stock units exercisable (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.25 1.30 1.42 2010 2009 2008 (1) The intrinsic value is calculated as the market value of the stock as of December 31, 2010. F-54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Fair Value Calculations – Restricted Shares and Restricted Stock Units The Company used a Monte Carlo simulation option-pricing model to determine the fair value of restricted shares and restricted stock units that have both a service and market price condition with the following weighted average assumptions for the years ended December 31: Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 0% 61% 3.74% Commencing February 2008, the Company ceased granting restricted shares and restricted stock units with a market price condition. The Company uses fair value of its common stock traded in the market on the date of the grant to determine the fair value of restricted shares and restricted stock units that have a service condition only or have both a service and performance condition. Employee Stock Purchase Plan In June 2004, the Company’s stockholders approved the adoption of the 2004 Employee Stock Purchase Plan (the “2004 Purchase Plan”) as a successor plan to a previous plan that ceased activity in 2005. A total of 500,000 shares have been reserved for issuance under the 2004 Purchase Plan, and the number of shares available for issuance under the 2004 Purchase Plan automatically increases on January 1 each year, beginning in 2005, by the lesser of 2% of the shares of common stock then outstanding or 500,000 shares. As of December 31, 2010, a total of 2,561,368 shares remained available for purchase under the 2004 Purchase Plan. The 2004 Purchase Plan permits eligible employees to purchase common stock on favorable terms via payroll deductions of up to 15% of the employee’s cash compensation, subject to certain share and statutory dollar limits. Two overlapping offering periods commence during each calendar year, on each February 15 and August 15 or such other periods or dates as determined by the Compensation Committee from time to time, and the offering periods last up to 24 months with a purchase date every six months. The price of each share purchased is 85% of the lower of a) the fair value per share of common stock on the last trading day before the commencement of the applicable offering period or b) the fair value per share of common stock on the purchase date. The 2004 Purchase Plan is administered by the Compensation Committee of the Board of Directors, and such plan will terminate automatically in June 2014 unless a) the 2004 Purchase Plan is extended by the Board of Directors and b) the extension is approved within 12 months by the Company’s stockholders. For the years ended December 31, 2010, 2009 and 2008, 207,212, 151,863 and 119,354 shares, respectively, were issued under the 2004 Purchase Plans at a weighted average purchase price of $46.80, $43.57 and $52.92 per share, respectively. Fair Value Calculations—Employee Stock Purchase Plans The Company uses the Black-Scholes option-pricing model to determine the fair value of shares purchased under the 2004 Purchase Plan with the following weighted average assumptions for the years ended December 31: Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life (in years) 2010 2009 2008 0% 0% 0% 51% 48% 59% 1.48% 2.70% 3.57% 1.25 1.25 1.25 F-55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The weighted-average fair value per share of shares purchased on the date of purchase was $28.97, $29.17 and $26.34, respectively, for the years ended December 31, 2010, 2009 and 2008. Stock-Based Compensation Recognized in the Consolidated Statement of Operations The Company generally recognizes stock-based compensation expense on a straight-line basis over the requisite service period of the awards. However, for awards with market condition or performance condition, stock-based compensation expense is recognized on a straight-line basis over the requisite service period for each vesting tranche of the award. As of December 31, 2010, the total stock-based compensation cost related to unvested equity awards not yet recognized, net of estimated forfeitures, totaled $86,259,000, which is expected to be recognized over a weighted-average period of 2.09 years. The following table presents, by operating expense, the Company’s stock-based compensation expense recognized in the Company’s consolidated statement of operations for the three years ended December 31 (in thousands): Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative . . . . . . . . . . . . . . . . . . . . . . . . Restructuring charges (1) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,082 12,666 48,740 1,488 $ 5,908 10,329 36,819 — $ 4,641 10,637 39,807 — 2010 2009 2008 $68,976 $53,056 $55,085 (1) See note 16, “Switch and Data Restructuring Charge”. The Company’s stock-based compensation recognized in the consolidated statement of operations was comprised of the following types of equity awards for the years ended December 31 (in thousands): Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restricted shares and restricted stock units . . . . . . . . . . . . Employee stock purchase plans . . . . . . . . . . . . . . . . . . . . . $12,604 50,830 5,542 $16,008 30,479 6,569 $19,873 31,899 3,313 2010 2009 2008 $68,976 $53,056 $55,085 During the year ended December 31, 2008, the Company entered into agreements with its two senior officers in Europe in connection with their resignations and modified their outstanding stock awards. As a result, the Company recorded an incremental stock-based compensation charge of $3,098,000, which is included in general and administrative expenses in the Company’s accompanying consolidated statements of operations for the year ended December 31, 2008. During the years ended December 31, 2010, 2009 and 2008, the Company capitalized $1,240,000, $747,000 and $574,000, respectively, of stock-based compensation expense as construction in progress in property, plant and equipment. F-56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. 12. Income Taxes Income or loss before income taxes is attributable to the following geographic locations for the years ended December 31 (in thousands): United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,942) 51,822 $ 69,343 39,685 $23,309 (3,004) Income before income taxes . . . . . . . . . . . . . . . . . . . $49,880 $109,028 $20,305 2010 2009 2008 The provision for income tax consisted of the following components for the years ended December 31 (in thousands). Current: 2010 2009 2008 Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ (169) (6,197) (152) (3,010) (8,957) Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,366) (12,119) Deferred: Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,162) (1,017) (2,454) (30,288) (1,957) 4,767 Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,633) (27,478) $ — (517) (1,302) (1,819) 73,944 11,134 4,360 89,438 Benefit (provision) for income taxes . . . . . . . . . . . . $(12,999) $(39,597) $87,619 State and foreign taxes not based on income are included in general and administrative expenses and the aggregated amount is insignificant for the fiscal years ended December 31, 2010, 2009 and 2008. The fiscal 2010, 2009 and 2008 income tax benefit (expense) differed from the amounts computed by applying the U.S. federal income tax rate of 35% to pre-tax income as a result of the following for the years ended December 31 (in thousands): Federal tax at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets generated in current year not benefited . . . . . Disallowed acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock option deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . Disallowed executives’ compensation . . . . . . . . . . . . . . . . . . . . . Foreign financing benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of tax settlement and rate change . . . . . . . . . . . . . . . . . . . . Uncertain tax positions reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 2009 2008 $(17,459) (1,186) (7,088) (3,105) (560) 7,697 (869) 7,238 — (641) 5,098 (2,124) $(38,160) (4,967) (6,028) — (2,758) 8,830 (493) — — (15) 4,830 (836) $ (7,107) (702) (5,036) — (672) 101,563 (1,032) — (526) (286) 1,518 (101) Total tax benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . $(12,999) $(39,597) $ 87,619 F-57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The Company has not provided for U.S. federal income and foreign withholding taxes on the undistributed earnings from non-U.S. operations as of December 31, 2010 because the Company intends to reinvest the earnings outside the U.S. for an indefinite period of time. If the Company were to distribute these earnings to the U.S. in the form of dividends or otherwise, the Company could be subject to both U.S. income taxes and foreign withholding taxes. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. The types of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities are set out below as of December 31 (in thousands): 2010 2009 Deferred tax assets: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charitable contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized currency loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating losses and credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 31,884 141 20,493 3 25 164,192 $ 15,474 32,820 73 17,147 3,549 870 54,540 Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,738 (42,040) 124,473 (34,364) Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,698 90,109 Deferred tax liabilities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed assets fair value step-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81,198) (26,154) (59,642) (56,763) — (32,526) (16,765) (15,576) Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (223,757) (64,867) Net deferred tax assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . $ (49,059) $ 25,242 The $49,059,000 of deferred tax liabilities as of December 31, 2010 are attributable to the Company’s operations in the United States, Canada and certain entities in Europe. The $25,242,000 of deferred tax assets as of December 31, 2009 are attributable to the Company’s operations in the United States, Australia, Hong Kong, Singapore and certain entities in Europe. As a result of the Switch and Data Acquisition, the Company recognized deferred tax liabilities in the U.S. and Canada for $66,493,000 attributable to identifiable intangibles and fixed assets’ fair value step-ups related to the purchase. In addition, as a result of the Upminster Acquisiton and Virtu Acquisition, the Company recognized deferred tax liabilities in a number of European jurisdictions attributable to the identifiable intangibles and fixed assets’ fair value step-ups related to the purchases. The Company’s deferred tax assets and liabilities are included in other current assets, other current liabilities, other assets and other liabilities on the accompanying consolidated balance sheets as of December 31, 2010 and 2009. The Company’s accounting for deferred taxes involves weighing positive and negative evidence concerning the realizability of the Company’s deferred tax assets in each tax jurisdiction. After considering such evidence as the nature, frequency and severity of current and cumulative financial reporting losses, and the sources of future F-58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. taxable income and tax planning strategies, management concluded that a 100% valuation allowance was required in certain foreign jurisdictions. A valuation allowance is provided for the deferred tax assets, net of deferred tax liabilities, associated with the Company’s operations in certain jurisdictions located in the Company’s Asia-Pacific and European regions. The operations in these jurisdictions still have significant losses as of the end of 2010. As such, management does not believe these operations have established a sustained history of profitability and that a valuation allowance is therefore necessary. During the year ended December 31, 2010, the Company released the valuation allowances of $5,200,000 and $2,100,000, respectively, against the deferred tax assets with one of its German entities and one of its Singaporean entities, as the German entity has sustained the consecutive two years profitability and is expected to be profitable in future years while the Singapore entity is merging into another profitable entity in the same jurisdiction while preserving all of its tax attributes. Upon evaluating the positive and negative evidence, management concluded it is more likely than not that the deferred tax assets of both entities will be fully realizable in the foreseeable future. During the year ended December 31, 2009, the Company released the valuation allowances of $3,119,000 and $5,196,000, respectively, against the deferred tax assets in Hong Kong and one of its U.K. entities as both entities have been profitable. Upon evaluating the positive and negative evidence, management concluded it was more likely than not that the deferred tax assets will be fully realizable in its operations in both entities. The Company released the valuation allowance against the deferred tax assets in the U.S. at the end of the fiscal year 2008. In reaching this decision, the Company assessed both the positive and negative evidence, which included the following: Positive Evidence: • In the fourth quarter of 2008, the U.S. business achieved three year cumulative profitability. The U.S. profit before tax (“PBT”), as adjusted for permanent tax differences, was positive in 2007 and 2008. In the fourth quarter of 2008, the trailing 12 quarters of U.S. PBT, as adjusted for permanent tax differences, moved from a loss to a profit. Prior to the fourth quarter of 2008 the Company would have had a three year cumulative loss. • The U.S. business has transitioned from losses to profit as a result of the Company’s recurring revenue model and a cost structure which has a large base that is fixed in nature and generally does not grow in proportion to revenue growth. Once the U.S. business achieved a size sufficient to cover the fixed cost base, incremental revenue will principally contribute to the U.S. PBT. The U.S. business was profitable for every quarter in 2008. • In 2008, the U.S. business began utilizing its deferred tax assets because of its PBT, as adjusted for permanent items. Additionally, the net operating losses can be carried forward for 20 years and the first year that the federal NOL’s begin to expire is 2019. The Company expected that in 2009 and thereafter that the U.S. business would be profitable, even after considering the effects of the financial crisis and credit crunch. Negative Evidence: • The U.S. business had no history of annual profitability prior to 2008 since inception. The cumulative losses since inception are significant and the net operating loss carry forwards as of December 31, 2008 for federal purposes were approximately $148,000,000. F-59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. • The Company does not see opportunities in its U.S. business that will allow the Company to implement any tax strategies to accelerate the recognition of taxable income and utilization of the net operating loss carryforwards. When conducting the quantitative and qualitative analysis of all the positive and negative evidence listed above, the Company gave significant weight to the achievement of three years of cumulative profitability that was achieved in the fourth quarter of 2008, the improving trends for profitability from 2006 to 2008, the nature of the Company’s business, and the utilization of the U.S. deferred tax assets in 2008. Therefore the Company concluded that the positive evidence out weighted the negative evidence and that it was more likely than not that the deferred tax assets will be realized. The Company also released the valuation allowance against the deferred tax assets in Australia at the end of fiscal year 2008, as such operations had been profitable every quarter in the three-year period. Upon evaluating the positive and negative evidence, management concluded it was more likely than not that the deferred tax assets will be fully realizable in its operations in Australia. The operations in Australia, Hong Kong, U.K. and the U.S. generated profit during the year ended December 31, 2010. Federal and state tax laws, including California tax laws, impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an “ownership change” for tax purposes, as defined in Section 382 of the Internal Revenue Code. In 2003, the Company conducted an analysis to determine whether an ownership change had occurred due to significant stock transactions in each of the reporting years disclosed at that time. The analysis indicated that an ownership change occurred during the fiscal year 2002, which resulted in an annual limitation of approximately $819,000 for net operating loss carryforwards generated prior to 2003. Therefore, the Company substantially reduced its federal and state net operating loss carryforwards for the periods prior to 2003 to approximately $16,400,000. In addition, an ownership change under Section 382 of the Internal Revenue Code was triggered in September 2007 by the issuance of 4,211,939 shares of the Company’s common stock. However, the annual limitation associated with this ownership change is not meaningful due to the substantial market capitalization of the Company at the time of the ownership change. The Company determined that no Section 382 ownership change occurred in 2010. In addition, the net operating loss acquired in the Switch and Data Acquisition is subject to the Section 382 limitation; however, the Company has determined that none of the acquired net operating loss will expire unused as a result of the limitation. The Company expects to pay an insignificant amount of cash tax for fiscal year 2011. The tax costs will be primarily limited to foreign income tax for the Company’s operations in Australia and Europe, and state income taxes. The Company did not pay a significant amount of tax for fiscal year 2010. The tax costs are primarily limited to foreign income tax for the Company’s operations in Europe. F-60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The Company had net operating loss carryforwards of approximately $517,988,000 and $209,776,000, respectively, for federal and state income tax purposes as of December 31, 2010. The net operating loss carryforwards expire, if not utilized, at various intervals from the years 2011 through 2030 as outlined below (in thousands): Expiration Date 2011 to 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 to 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 to 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 to 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 to 2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026 to 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2029 & thereafter Net Operating Loss Carry Forwards Federal States $ — — 10,950 103,886 67,905 145,043 190,204 $ 7,194 9,012 69,408 53,637 23,644 31,416 15,465 $517,988 $209,776 Approximately $132,000,000 of the total net operating loss carryforwards is attributable to excess employee stock option deductions, the benefit from which will be credited to additional paid-in capital when subsequently utilized in future years. In addition, the Company’s foreign operations had approximately $135,675,000 of net operating loss carryforwards for local income tax purposes, of which approximately $36,912,000 expires, if not utilized, at various intervals from the years 2011 through 2019 while the rest of the foreign operating losses can be carried forward indefinitely. The beginning and ending balances of the Company’s unrecognized tax benefits are reconciled below (in thousands): Unrecognized tax benefits as of December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . Gross increase related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . Gross increase related to current year tax positions . . . . . . . . . . . . . . . . . . . . . Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,166 84 310 (1,373) Unrecognized tax benefits as of December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . Gross increase related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . Gross increase related to current year tax positions . . . . . . . . . . . . . . . . . . . . . Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized tax benefits as of December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . Gross increase related to prior year tax positions . . . . . . . . . . . . . . . . . . . . . . Gross increase related to current year tax positions . . . . . . . . . . . . . . . . . . . . . Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,187 112 260 — 1,559 14,742 315 — Unrecognized tax benefits as of December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . $16,616 The unrecognized tax benefits of $16,616,000 as of December 31, 2010, if subsequently recognized, will affect the Company’s effective tax rate favorably at the time when such a benefit is recognized. As a result of the Switch and Data Acquisition, the Company increased the unrecognized tax benefits by $13,893,000 related to the uncertain tax positions relating to prior years. During fiscal year 2008, the Company reached a final agreement with a state in which it once operated to close an appeal filed by the Company in that state’s tax court. The Company filed the appeal in 2006 to contest the decision made by the state auditor disallowing the refundable research and capital goods credits. As a result of the settlement, the total unrecognized tax benefit decreased by $1,373,000 for the year. F-61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Due to various tax years open for examination, it is reasonably possible that the balance of unrecognized tax benefits could significantly increase or decrease over the next twelve months as the Company may be subject to either examination by tax authorities or a lapse in statute limitations. The Company is currently unable to estimate the range of possible adjustments to the balance of unrecognized tax benefits. The Company’s income tax returns for all tax years remain open to examination by federal and state taxing authorities due to the Company’s net operating loss carryforwards. In addition, the Company’s tax years of 2003 through 2009 remain open and subject to examination by local tax authorities in certain foreign jurisdictions in which the Company has major operations. There were two income tax audits in the Company’s foreign jurisdictions during the year ended December 31, 2010. The Company received a preliminary assessment for one of the audits and has filed the request to appeal the assessment. The Company believed that it has a sufficient reserve for the assessment and the final outcome of the appeal will not significantly impact the Company’s financial position. The Company does not expect a significant adjustment will result from another audit, which is at the late stage of field examination. 13. Commitments and Contingencies Operating Lease Commitments The Company currently leases the majority of its IBX data centers and certain equipment under noncancelable operating lease agreements. The majority of the Company’s operating leases for its IBX data centers expire at various dates from 2011 through 2035 with renewal options available to the Company. The lease agreements typically provide for base rental rates that increase at defined intervals during the term of the lease. In addition, the Company has negotiated some rent expense abatement periods for certain leases to better match the phased build-out of its IBX data centers. The Company accounts for such abatements and increasing base rentals using the straight-line method over the life of the lease. The difference between the straight-line expense and the cash payment is recorded as deferred rent (see Note 4, “Other Current Liabilities” and “Other Liabilities”). Minimum future operating lease payments, excluding operating leases covered under restructuring charges (see Note 16), as of December 31, 2010 are summarized as follows (in thousands): Year ending: 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,126 116,749 117,158 112,112 94,493 538,357 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,090,995 Total rent expense was approximately $103,101,000, $61,359,000 and $50,366,000 for the years ended December 31, 2010, 2009 and 2008, respectively. Other Purchase Commitments Primarily as a result of the Company’s various IBX expansion projects, as of December 31, 2010, the Company was contractually committed for $199,422,000 of unaccrued capital expenditures, primarily for IBX F-62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. equipment not yet delivered and labor not yet provided, in connection with the work necessary to open these IBX data centers and make them available to customers for installation. In addition, the Company had numerous other, non-capital purchase commitments in place as of December 31, 2010, such as commitments to purchase power in select locations, primarily in select locations through 2011 and thereafter, and other open purchase orders for goods or services to be delivered or provided during 2011 and thereafter. Such other miscellaneous purchase commitments totaled $118,136,000 as of December 31, 2010. Legal Matters IPO Litigation On July 30, 2001 and August 8, 2001, putative shareholder class action lawsuits were filed against the Company, certain of its officers and directors (the “Individual Defendants”), and several investment banks that were underwriters of the Company’s initial public offering (the “Underwriter Defendants”). The cases were filed in the United States District Court for the Southern District of New York. Similar lawsuits were filed against approximately 300 other issuers and related parties. These lawsuits have been coordinated before a single judge. The purported class action alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b), Rule 10b-5 and 20(a) of the Securities Exchange Act of 1934 against the Company and the Individual Defendants. The plaintiffs have since dismissed the Individual Defendants without prejudice. The suits allege that the Underwriter Defendants agreed to allocate stock in the Company’s initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices. The plaintiffs allege that the prospectus for the Company’s initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements. The action seeks damages in an unspecified amount. On February 19, 2003, the court dismissed the Section 10(b) claim against the Company, but denied the motion to dismiss the Section 11 claim. The parties in the approximately 300 coordinated cases, including the parties in the Equinix case, reached a settlement. It provides for releases of existing claims and claims that could have been asserted relating to the conduct alleged to be wrongful from the class of investors participating in the settlement. The insurers for the issuer defendants in the coordinated cases will make the settlement payment on behalf of the issuers, including Equinix. On October 6, 2009, the Court granted final approval to the settlement. Six notices of appeal and one petition seeking permission to appeal were filed. Objectors to the settlement have filed briefs in support of two separate appeals. The remaining objectors have withdrawn their appeals with prejudice. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows. Pihana Litigation On August 22, 2008, a complaint was filed against Equinix, certain former officers and directors of Pihana Pacific, Inc. (“Pihana”), certain investors in Pihana, and others. The lawsuit was filed in the First Circuit Court of the State of Hawaii, and arises out of December 2002 agreements pursuant to which Equinix merged Pihana and i-STT (a subsidiary of Singapore Technologies Telemedia Pte Ltd) into the Internet exchange services business of Equinix. Plaintiffs, who were allegedly holders of Pihana common stock, allege that their rights as shareholders were violated, and the transaction was effectuated improperly, by Pihana’s majority shareholders, officers and directors, with the alleged assistance of Equinix and others. Among other things, plaintiffs contend that they effectively had a right to block the transaction, that this supposed right was disregarded, and that they F-63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. improperly received no consideration when the deal was completed. The complaint seeks to recover unspecified punitive damages, equitable relief, fees and costs, and compensatory damages in an amount that plaintiffs allegedly “believe may be all or a substantial portion of the approximately $725,000,000 value of Equinix held by Defendants” (a group that includes more than 30 individuals and entities). An amended complaint, which adds new plaintiffs (other alleged holders of Pihana common stock) but is otherwise substantially similar to the original pleading, was filed on September 29, 2008 (the “Amended Complaint”). On October 13, 2008, a complaint was filed in a separate action by another purported holder of Pihana common stock, naming the same defendants and asserting substantially similar allegations as the August 22, 2008 and September 29, 2008 pleadings. On December 12, 2008, the court entered a stipulated order, which consolidated the two actions under one case number and set January 22, 2009 as the last day for Defendants to move to dismiss or otherwise respond to the Amended Complaint, the operative complaint in this case. On January 22, 2009, motions to dismiss the Amended Complaint were filed by Equinix and other Defendants. On April 24, 2009, plaintiffs filed a Second Amended Complaint (“SAC”) to correct the naming of certain parties. The SAC is otherwise substantively identical to the Amended Complaint, and all motions to dismiss the Amended Complaint have been treated as responsive to the SAC. On September 1, 2009, the Court heard Defendants’ motions to dismiss the SAC and ruled at the hearing that all claims against all Defendants are time-barred. The Court also considered whether there were further independent grounds for dismissing the claims, and supplemental briefing was submitted with respect to claims against one defendant and plaintiffs’ renewed request for further leave to amend. On March 23, 2010, the Court entered final Orders granting the motions to dismiss as to all Defendants and issued a minute Order denying plaintiffs’ renewed request for further leave to amend. On May 21, 2010, plaintiffs filed a Notice of Appeal, and plaintiffs’ appeal is currently pending before the Hawaii Supreme Court. The Company believes that plaintiffs’ claims and alleged damages are without merit and it intends to continue to defend the litigation vigorously. Due to the inherent uncertainties of litigation, the Company cannot accurately predict the ultimate outcome of the matter. The Company is unable at this time to determine whether the outcome of the litigation would have a material impact on its results of operations, financial condition or cash flows. 529 Bryant Litigation On September 10, 2010, a lawsuit was filed in the Superior Court of California in Santa Clara County by 529 Bryant Street Partners LLC (“Landlord”) against the Company’s wholly-owned subsidiaries Switch & Data CA Nine LLC (“Tenant”) and Switch & Data Facilities Company, Inc. (“Guarantor”). The lawsuit alleged that Tenant breached certain non-monetary obligations under its lease (the “Lease”) of the Company’s data center located at 529 Bryant Street in Palo Alto, California (the “Premises”) and sought monetary damages, specific performance of those non-monetary obligations and ejectment of Tenant from the Premises. The lawsuit also alleged that Guarantor breached its obligations under its guaranty of the Lease. On November 10, 2010, Tenant and Landlord entered into an agreement pursuant to which Landlord agreed to dismiss its lawsuit against Tenant, and waive and release all claims against Tenant related thereto. In connection with the agreement, Tenant agreed to an increase in rent under the Lease and Landlord agreed to certain improved non-monetary lease terms. Equinix also agreed to guaranty the obligations of Tenant under the Lease. The lawsuit was dismissed with prejudice on November 15, 2010. F-64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. Litigation Summary The Company believes that while an unfavorable outcome to these litigations is reasonably possible, a range of potential loss cannot be determined at this time. As a result, the Company had not accrued for any amounts in connection with these legal matters as of December 31, 2010. The Company and its officers and directors intend to continue to defend the actions vigorously. Estimated and Contingent Liabilities The Company estimates exposure on certain liabilities, such as income and property taxes, based on the best information available at the time of determination. With respect to real and personal property taxes, the Company records what it can reasonably estimate based on prior payment history, current landlord estimates or estimates based on current or changing fixed asset values in each specific municipality, as applicable. However, there are circumstances beyond the Company’s control whereby the underlying value of the property or basis for which the tax is calculated on the property may change, such as a landlord selling the underlying property of one of the Company’s IBX data center leases or a municipality changing the assessment value in a jurisdiction and, as a result, the Company’s property tax obligations may vary from period to period. Based upon the most current facts and circumstances, the Company makes the necessary property tax accruals for each of its reporting periods. However, revisions in the Company’s estimates of the potential or actual liability could materially impact the financial position, results of operations or cash flows of the Company. From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims for which the outcome is expected to result in a material adverse effect in the financial position, results of operations or cash flows of the Company. Employment Agreements The Company has entered into a severance agreement with each of its executive officers that provides for a severance payment equal to the executive officer’s annual base salary and maximum bonus in the event his or her employment is terminated for any reason other than cause or he or she voluntarily resigns under certain circumstances as described in the agreement. In addition, under the agreement, the executive officer is entitled to the payment of his or her monthly health care premiums under the Consolidated Omnibus Budget Reconciliation Act for up to 12 months. For certain executive officers, these benefits are only triggered after a change-in-control of the Company. Guarantor Arrangements As permitted under Delaware law, the Company has agreements whereby the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is, or was serving, at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that limits the Company’s exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no liabilities recorded for these agreements as of December 31, 2010. F-65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company’s business partners or customers, in connection with any U.S. patent, or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s services. The term of these indemnification agreements is generally perpetual any time after execution of the agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. The Company has no liabilities recorded for these agreements as of December 31, 2010. The Company enters into arrangements with its business partners, whereby the business partner agrees to provide services as a subcontractor for the Company’s implementations. Accordingly, the Company enters into standard indemnification agreements with its customers, whereby the Company indemnifies them for other acts, such as personal property damage, of its subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has general and umbrella insurance policies that enable the Company to recover a portion of any amounts paid. The Company has never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. The Company has no liabilities recorded for these agreements as of December 31, 2010. The Company has service level commitment obligations to certain of its customers. As a result, service interruptions or significant equipment damage in the Company’s IBX data centers, whether or not within the Company’s control, could result in service level commitments to these customers. The Company’s liability insurance may not be adequate to cover those expenses. In addition, any loss of services, equipment damage or inability to meet the Company’s service level commitment obligations could reduce the confidence of the Company’s customers and could consequently impair the Company’s ability to obtain and retain customers, which would adversely affect both the Company’s ability to generate revenues and the Company’s operating results. The Company generally has the ability to determine such service level credits prior to the associated revenue being recognized. The Company has no significant liabilities in connection with service level credits as of December 31, 2010. 14. Related Party Transactions The Company has several significant stockholders and other related parties that are also customers and/or vendors. The Company’s related party transactions are considered arms-length transactions. The Company’s activity of related party transactions was as follows (in thousands): Years ended December 31, 2010 2009 2008 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs and services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,627 3,246 $23,419 1,128 $20,361 1,944 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,719 354 $4,614 34 As of December 31, 2010 2009 F-66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. 15. Segment Information During the year ended December 31, 2010, the Company changed its reportable segments as a result of the addition of Switch and Data’s Canadian operations in connection with the Switch and Data Acquisition. The Company’s prior U.S. segment was re-designated as the North America segment. The change in reportable segments did not impact the Company’s prior periods’ segment disclosures. While the Company has a single line of business, which is the design, build-out and operation of IBX data centers, it has determined that it has three reportable segments comprised of its North America, Europe and Asia-Pacific geographic regions. The Company’s chief operating decision-maker evaluates performance, makes operating decisions and allocates resources based on the Company’s revenue and adjusted EBITDA performance both on a consolidated basis and based on these three geographic regions. The Company provides the following segment disclosures as follows for the years ended December 31 (in thousands): Total revenues: 2010 2009 2008 North America (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 776,175(2) $535,489 228,136 118,884 281,793 162,366 $442,803 177,502 84,375 $1,220,334 $882,509 $704,680 Total depreciation and amortization: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 171,515(2) $105,038 43,415 25,077 59,699 28,962 $ 99,892 41,048 18,107 $ 260,176 $173,530 $159,047 Income from operations: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,118(2) $128,168 31,202 21,709 34,929 38,664 $ 66,202 1,442 5,618 $ 194,711 $181,079 $ 73,262 Capital expenditures: North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 453,371(3) $186,242 $218,698 163,664(4) 152,576(5) 166,849(6) 58,900 90,512 84,726 $ 707,547 $397,718 $470,273 (1) (2) (3) (4) (5) (6) Includes revenues of $762,642 attributed to the U.S for the year ended December 31, 2010. Includes the operations of Switch and Data from May 1, 2010 to December 31, 2010. Includes the purchase price for the Switch and Data Acquisition (see Note 2), net of cash acquired, totaling $113,289. Includes the purchase price for the Amsterdam IBX property totaling $14,861 (see Note 3). Includes the purchase price for the Upminster Acquisition (see Note 2), net of cash acquired, totaling $28,176. Includes the purchase price for the Virtu Acquisition (see Note 2), net of cash acquired, totaling $23,241. F-67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. The Company’s long-lived assets are located in the following geographic areas as of December 31 (in thousands): North America (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia-Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,764,630 596,609 289,714 $1,130,637 493,492 183,986 2010 2009 $2,650,953 $1,808,115 (1) Includes $1,741,438 of long-lived assets attributed to the U.S. Revenue information on a services basis is as follows for the years ended December 31 (in thousands): Colocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interconnection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managed infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rental Recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-recurring revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 2009 2008 $ 956,436 171,009 30,502 2,471 1,160,418 59,916 $704,860 106,894 29,004 1,091 841,849 40,660 $542,943 93,739 29,453 1,028 667,163 37,517 $1,220,334 $882,509 $704,680 16. Restructuring Charges Switch and Data Restructuring Charge During the year ended December 31, 2010, the Company recorded restructuring charges related to one-time termination benefits, primarily comprised of severance, attributed to certain Switch and Data employees as presented below (in thousands): Severance-related expenses (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash payments (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,360 (2,837) (1,488) Accrued restructuring charge as of December 31, 2010 (3) . . . . . . . . . . . . . . . . . . . $ 1,035 Included in the consolidated statements of operations as a restructuring charge. (1) (2) A stock-based compensation charge incurred as a result of modifying equity awards for one of the former Switch and Data executives to accelerate vesting. Included within other current liabilities. (3) As of December 31, 2010, the Company’s remaining accrued restructuring charge associated with the Switch and Data Acquisition is expected to be paid out during the first quarter of 2011. The Company anticipates that it will incur additional restructuring charges in connection with the Switch and Data Acquisition related to one-time termination benefits during the first four months of 2011. F-68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. 2004 Restructuring Charge In December 2004, in light of the availability of fully built-out data centers in select markets at costs significantly below those costs the Company would incur in building out new space, the Company made the decision to exit leases for excess space adjacent to one of the Company’s New York metro area IBXs, as well as space on the floor above its original Los Angeles IBX. As a result of the Company’s decision to exit these spaces, the Company recorded restructuring charges totaling $17,685,000, which represents the present value of the Company’s estimated future cash payments, net of estimated sublease income and expense, through the remainder of these lease terms, as well as the write-off of all remaining property, plant and equipment attributed to the partial build-out of the excess space on the floor above its Los Angeles IBX. The Company estimated the future cash payments required to exit these two leased spaces, net of any estimated sublease rental income and expense, through the remainder of these lease terms and then calculated the present value of such future cash flows in order to determine the appropriate restructuring charge to record. Subsequent to recording the initial restructuring charge, the Company records accretion expense to accrete its accrued restructuring liability up to an amount equal to the total estimated future cash payments necessary to complete the exit of these leases. Should the actual lease exit costs differ from the Company’s estimates, the Company may need to adjust its restructuring charges associated with the excess lease spaces, which would impact net income in the period such determination was made. A summary of the movement in the 2004 accrued restructuring charges during the year ended December 31, 2010 is outlined as follows (in thousands): Accrued restructuring charge as of December 31, 2009 Accretion expense Restructuring charge adjustments Cash payments Accrued restructuring charge as of December 31, 2010 Estimated lease exit costs . . . . . . . . . . . . . . . . . . . $ 5,919 5,919 $303 $303 $1,374 $1,374 $(1,590) $ 6,006 $(1,590) 6,006 Less current portion . . . . . . . . . . . . . . . . . . . . . . . (2,403) $ 3,876 (2,054) $ 3,952 A summary of the movement in the 2004 accrued restructuring charges during the year ended December 31, 2009 is outlined as follows (in thousands): Accrued restructuring charge as of December 31, 2008 Accretion expense Restructuring charge adjustments Cash payments Accrued restructuring charge as of December 31, 2009 Estimated lease exit costs . . . . . . . . . . . . . . . . . . . $13,311 13,311 $432 $432 $(6,053) $(1,771) $ 5,919 $(6,053) $(1,771) 5,919 Less current portion . . . . . . . . . . . . . . . . . . . . . . . (6,023) $ 7,288 F-69 (2,403) $ 3,876 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. A summary of the movement in the 2004 accrued restructuring charges during the year ended December 31, 2008 is outlined as follows (in thousands): Accrued restructuring charge as of December 31, 2007 Accretion expense Restructuring charge adjustments Cash payments Accrued restructuring charge as of December 31, 2008 Estimated lease exit costs . . . . . . . . . . . . . . . . . . . $12,140 12,140 $792 $792 $3,142 $3,142 $(2,763) $13,311 $(2,763) 13,311 Less current portion . . . . . . . . . . . . . . . . . . . . . . . (3,973) $ 8,167 (6,023) $ 7,288 During the year ended December 31, 2010, the Company recorded an additional restructuring charge of $1,374,000 as a result of revised sublease assumptions on its excess space lease in the New York metro area. During the year ended December 31, 2009, the Company recorded reductions to the restructuring charges totaling $6,053,000, of which $5,833,000 was a reversal of accrued restructuring charges associated with the Los Angeles lease as the Company decided to utilize this space it previously abandoned in order to expand its original Los Angeles IBX data center. During the years ended December 31, 2008, the Company recorded additional restructuring charges totaling $3,142,000 as a result of revised sublease assumptions. The Company’s excess space in the New York metro area remains abandoned and continues to be an accrued restructuring charge. As the Company currently has no plans to enter into lump sum lease terminations with the landlord associated with the excess space lease in the New York metro area, the Company has reflected its accrued restructuring liability as both current and non-current liability. The Company reports accrued restructuring charges within other current liabilities and other liabilities on the accompanying consolidated balance sheets as of December 31, 2010 and 2009. The Company is contractually committed to this excess space lease through 2015. The Company’s minimum future payments associated with one excess space lease is as follows (in thousands): 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less amount representing estimated sublease income and expense . . . . . . . . . . . . Less amount representing accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,463 2,429 2,444 2,459 1,444 11,239 (4,496) 6,743 (738) 6,006 (2,054) $ 3,952 17. Subsequent Events On January 1, 2011, pursuant to the provisions of the 2004 Employee Stock Purchase Plan (see Note 11), the number of common shares in reserve automatically increased by 500,000 shares. F-70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. In February 2011, the Company amended the Bank of America Revolving Credit Line (see Note 7) and extended the maturity date to February 2012. The amended Bank of America Revolving Credit Line is used primarily as a letter of credit issuing facility, and to fund the Company’s working capital if so needed, and is unsecured. In February 2011, Zion RJ Participações S.A. (the “Joint Venture”), a Brazilian joint-stock company controlled indirectly by the Company and Riverwood Capital L.P. (“Riverwood”), entered into a share purchase agreement and other covenants (the “Share Purchase Agreement”) with the shareholders (the “Sellers”) of ALOG Data Centers do Brasil S.A. (“ALOG”), ALOG and ALOG’s subsidiaries, pursuant to which, subject to the satisfaction or waiver of the conditions therein, the Joint Venture will acquire approximately 90% of the outstanding capital stock of ALOG from the Sellers. The Joint Venture will pay approximately 211,000,000 Brazilian reais in cash, or approximately $127,000,000, to acquire the ALOG capital stock, subject to certain balance sheet adjustments as provided in the Share Purchase Agreement, at the closing of the transaction (the “Closing”). A portion of the purchase price will be withheld by the Joint Venture at the Closing to cover potential indemnification claims, and any balance will be paid to the Sellers by the Joint Venture two years following the Closing. Under the terms of the Share Purchase Agreement, either the Joint Venture or the Sellers may terminate the Share Purchase Agreement if the Closing has not taken place on or before May 10, 2011. 18. Quarterly Financial Information (Unaudited) The Company believes that period-to-period comparisons of its financial results should not be relied upon as an indication of future performance. The Company’s revenues and results of operations have been subject to significant fluctuations, particularly on a quarterly basis, and the Company’s revenues and results of operations could fluctuate significantly quarter-to-quarter and year-to-year. Significant quarterly fluctuations in revenues will cause fluctuations in the Company’s cash flows and the cash and cash equivalents and accounts receivable accounts on the Company’s consolidated balance sheet. Causes of such fluctuations may include the volume and timing of new orders and renewals, the timing of the opening of new IBX data centers, the sales cycle for the Company’s services, the introduction of new services, changes in service prices and pricing models, trends in the Internet infrastructure industry, general economic conditions, extraordinary events such as acquisitions or litigation and the occurrence of unexpected events. The unaudited quarterly financial information presented below has been prepared by the Company and reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to present fairly the financial position and results of operations for the interim periods presented. The following table presents selected quarterly information (in thousands except per share data): 2010 Quarter ended March 31 June 30 (a) September 30 December 31 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $248,649 115,599 14,199 0.36 0.35 $296,094 133,512 (2,274) (0.05) (0.05) $330,347 144,871 11,196 0.24 0.24 $345,244 151,685 13,760 0.30 0.29 (a) Represents the first quarter of combined results since the Switch and Data Acquisition (see Note 2). F-71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) EQUINIX, INC. 2009 Quarter ended March 31 June 30 September 30 December 31 Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $199,231 87,426 15,457 0.41 0.40 $213,168 94,634 17,440 0.46 0.44 $227,558 101,551 18,812 0.49 0.47 $242,552 115,478 17,722 0.45 0.44 F-72 EQUINIX, INC. December , 2010 Exhibit 10.33 [Name] [Address] [Address] Dear : You and Equinix, Inc. (the “Company”) signed a [severance agreement][change in control severance agreement] dated (the “Severance Agreement”). Benefits under the Severance Agreement are intended to be exempt from the application of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). However, to avoid the inadvertent or unintended application of Code Section 409A(a)(1) to benefits under the Severance Agreement, the Severance Agreement is hereby amended as follows: (a) The following sentence is hereby added to the end of Section 2(a) of the Severance Agreement: Notwithstanding the foregoing, if the severance payment is considered deferred compensation under Code Section 409A, then the Executive will receive his or her severance payment in a cash lump-sum which will be made on the 60 th day following Executive’s Qualifying Termination (or, if such day is not a business day, on the first business day thereafter). (b) The penultimate sentence of Section 6(a) in the Severance Agreement, entitled “Best After-Tax Result,” is deleted in its entirety and replaced with the following: In the event that Section 6(a)(ii)(B) above applies, then based on the information provided to the Company by Independent Tax Counsel, the Company shall reduce or eliminate the Payments in the following order, until the amounts payable or distributable to Executive equals the Reduced Amount: (i) reduction of cash payments; (ii) cancellation of accelerated vesting of equity awards other than stock options; (iii) cancellation of accelerated vesting of stock options; and (iv) reduction of other benefits paid to the Executive. In the event that acceleration of vesting is reduced, such acceleration of vesting shall be cancelled in the reverse order of date of grant of the Executive’s equity awards. In the event that cash payments or other benefits are reduced, such reduction shall occur in reverse order beginning with payments or benefits which are to be paid [Name] [Date] Page 2 the farthest in time from the date of Independent Tax Counsel’s determination under this Section. Except as expressly set forth above, the Severance Agreement will remain in effect without change. You may indicate your agreement with this amendment of the Severance Agreement by signing and dating the enclosed duplicate original of this letter agreement and returning it to me. This letter agreement may be executed in two counterparts, each of which will be deemed an original, but both of which together will constitute one and the same instrument. Very truly yours, EQUINIX, INC. By: Title: I have read and accept this amendment: Dated: EQUINIX, INC. December 14, 2010 Exhibit 10.34 Eric Schwartz 51-53 Great Marlborough Street London W1F 7JT United Kingdom Dear Eric: You and Equinix, Inc. (the “Company”) signed a change in control severance agreement dated December 19, 2008 (the “Severance Agreement”). You also entered into an agreement with the Company dated April 22, 2008 regarding expatriate benefits, which was amended on December 19, 2008 and February 17, 2010 (the “Expatriate Agreement” and the “Expatriate Amendments,” respectively). Severance benefits under the Severance Agreement, the Expatriate Agreement and the Expatriate Amendments (collectively, the “Agreements”) are intended to be exempt from the application of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). However, to avoid the inadvertent or unintended application of Code Section 409A(a)(1) to benefits under the Agreements, the Agreements are hereby amended as follows: (a) The following sentence is hereby added to the end of Section 2(a) of the Severance Agreement: Notwithstanding the foregoing, if the severance payment is considered deferred compensation under Code Section 409A, then the Executive will receive his or her severance payment in a cash lump-sum which will be made on the 60 th day following Executive’s Qualifying Termination (or, if such day is not a business day, on the first business day thereafter). (b) The penultimate sentence of Section 6(a) in the Severance Agreement, entitled “Best After-Tax Result,” is deleted in its entirety and replaced with the following: In the event that Section 6(a)(ii)(B) above applies, then based on the information provided to the Company by Independent Tax Counsel, the Company shall reduce or eliminate the Payments in the following order, until the amounts payable or distributable to Executive equals the Reduced Amount: (i) reduction of cash payments; (ii) cancellation of accelerated vesting of equity awards other than stock options; (iii) cancellation of accelerated vesting of stock options; and (iv) reduction of other benefits paid to the Executive. In the event Eric Schwartz Page 2 that acceleration of vesting is reduced, such acceleration of vesting shall be cancelled in the reverse order of date of grant of the Executive’s equity awards. In the event that cash payments or other benefits are reduced, such reduction shall occur in reverse order beginning with payments or benefits which are to be paid the farthest in time from the date of Independent Tax Counsel’s determination under this Section. (c) The following sentence is hereby added to the end of the second paragraph of the section entitled “Return to Home Country” of the Expatriate Amendment: Notwithstanding the foregoing, if the severance payment is considered deferred compensation under Section 409A of the Code, then you will receive the severance payment on the 60 day following your Separation (or, if such day is not a business day, on the first business day thereafter). th Except as expressly set forth above, the Agreements will remain in effect without change. You may indicate your agreement with this amendment of the Agreements by signing and dating the enclosed duplicate original of this letter agreement and returning it to me. This letter agreement may be executed in two counterparts, each of which will be deemed an original, but both of which together will constitute one and the same instrument. Very truly yours, EQUINIX, INC. /s/ Steve Smith By: Title: CEO & President I have read and accept this amendment: /s/ Eric Schwartz Dated: 12/14/2010 Subsidiaries of Equinix, Inc. Exhibit 21.1 Name Equinix Operating Co., Inc. Equinix RP, Inc. Equinix South America Holdings, LLC Equinix RP II LLC CHI 3, LLC NY3, LLC SV1, LLC LA4, LLC Equinix Pacific, Inc. CHI 3 Procurement, LLC Equinix Asia Pacific Pte Ltd Equinix Singapore Holdings Pte Ltd Equinix Singapore Pte Ltd Equinix Japan KK (in Kanji) Equinix Australia Pty Ltd Equinix Hong Kong Ltd Equinix Europe Ltd Equinix Group Ltd Equinix (UK) Ltd Equinix (Services) Ltd Equinix Corporation Ltd Equinix Investments Ltd Equinix (London) Ltd Equinix (Dusseldorf) GmbH Equinix (Real Estate) GmbH Equinix (Germany) GmbH Equinix (IBX Services) GmbH Upminster GmhH Equinix (France) SAS Equinix Paris SAS Interconnect Exchange Europe SL Equinix (Switzerland) AG Equinix Services (Switzerland) AG Intelisite BV Equinix (Netherlands) BV Equinix (Netherlands) Holding Coöperatie U.A Equinix (Holdings) B.V. Virtu Secure Web Services BV Equinix (Real Estate) B.V. Equinix (Luxembourg) Holdings S.à r.l. Equinix (Luxembourg) Investments S.à r.l. Switch & Data Facilities Company, Inc. Switch & Data Holdings, Inc. Equinix Services, Inc. Switch & Data Facilities Company LLC Switch and Data Operating Company LLC Equinix Operating Co LLC Equinix Canada Ltd. Switch & Data AZ One LLC Jurisdiction Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Illinois, U.S. Singapore Singapore Singapore Japan Australia Hong Kong United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom United Kingdom Germany Germany Germany Germany Germany France France Spain Switzerland Switzerland The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands The Netherlands Luxembourg Luxembourg Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Canada Delaware, U.S. Switch & Data CA One LLC Switch & Data CA Two LLC Switch and Data CA Nine LLC Switch And Data CA Eleven LLC Switch & Data CO One LLC Switch & Data FL One LLC Switch & Data FL Two LLC Switch and Data FL Seven LLC Switch and Data GA Three LLC Switch and Data GA Four LLC Switch & Data IL One LLC Switch & Data IN One LLC Switch & Data MA One LLC Switch & Data MI One LLC Switch & Data MO One LLC Switch And Data NJ Two LLC Switch & Data NY One LLC Switch and Data NY Four LLC Switch and Data NY Five LLC Switch & Data/NY Facilities Company, LLC Switch & Data OH One LLC Switch & Data PA Two LLC Switch and Data PA Three LLC Switch and Data PA Four LLC Switch & Data TN Two LLC Switch & Data TX One LLC Switch and Data TX Five LP Switch and Data Dallas Holdings I LLC Switch and Data Dallas Holdings II LLC Switch & Data VA One LLC Switch & Data VA Two LLC Switch and Data VA Four LLC Switch & Data WA One LLC Switch and Data WA Three LLC Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. Delaware, U.S. CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-45280, 333-58074, 333-71870, 333-85202, 333-104078, 333-113765, 333-117892, 333-122142, 333-132466, 333-140946, 333-149452, 333-157545, 333-165033 and 333-166581) and Form S-3 (Nos. 333-165024) of Equinix, Inc. of our report dated February 25, 2011 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. Exhibit 23.1 /s/ PricewaterhouseCoopers LLP San Jose, California February 25, 2011 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Stephen M. Smith, certify that: 1. I have reviewed this annual report on Form 10-K of Equinix, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Dated: February 25, 2011 /s/ Stephen M. Smith Stephen M. Smith Chief Executive Officer and President Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Keith D. Taylor, certify that: 1. I have reviewed this annual report on Form 10-K of Equinix, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Dated: February 25, 2011 /s/ Keith D. Taylor Keith D. Taylor Chief Financial Officer CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.1 In connection with the Annual Report of Equinix, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Stephen M. Smith, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Stephen M. Smith Stephen M. Smith Chief Executive Officer and President February 25, 2011 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 In connection with the Annual Report of Equinix, Inc. (the “Company”) on Form 10-K for the period ending December 31, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Keith D. Taylor, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Keith D. Taylor Keith D. Taylor Chief Financial Officer February 25, 2011

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