EQUINIX, INC. 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. Item 7 of this Form 10-K focuses on discussion of 2019 and 2018 items as well as 2019 results as compared to 2018 results. For the discussion of 2017 items and 2018 results as compared to 2017 results, please refer to Item 7 of our 2018 Form 10-K as filed with theSEC onFebruary 22, 2019 . 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
Overview
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Equinix provides a global, vendor-neutral data center, interconnection and edge
services platform with offerings that aim to enable our customers to reach
everywhere, interconnect everyone and integrate everything. Global enterprises,
service providers and business ecosystems of industry partners rely on Equinix
IBX data centers and expertise around the world for the safe housing of their
critical IT equipment and to protect and connect the world's most valued
information assets. They also look to Platform Equinix® for the ability to
directly and securely interconnect
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to the networks, clouds and content that enable today's information-driven global digital economy. Recent Equinix IBX data center openings and acquisitions, as well as xScale data center investments, have expanded our total global footprint to 210 IBX and xScale data centers across 55 markets around the world.Equinix offers the following solutions: • premium data center colocation;
• interconnection and data exchange solutions;
• edge services for deploying networking, security and hardware; and
• remote expert support and professional services.
Our interconnected data centers around the world allow our customers to increase information and application delivery performance to users, and quickly access distributed IT infrastructures and business and digital ecosystems, while significantly reducing costs. TheEquinix global platform and the quality of our IBX data centers, interconnection offerings and edge services have enabled us to establish a critical mass of customers. As more customers choose PlatformEquinix , for bandwidth cost and performance reasons it benefits their suppliers and business partners to colocate in the same data centers. This adjacency creates a "network effect" that enables our customers to capture the full economic and performance benefits of our offerings. These partners, in turn, pull in their business partners, creating a "marketplace" for their services. Our global platform enables scalable, reliable and cost-effective interconnection that increases data traffic exchange while lowering overall cost and increasing flexibility. Our focused business model is built on our critical mass of enterprise and service provider customers and the resulting "marketplace" effect. This global platform, combined with our strong financial position, continues to drive new customer growth and bookings. Historically, our market was served by large telecommunications carriers who have bundled their products and services with their colocation offerings. The data center market landscape has evolved to include private and vendor-neutral multitenant data center providers, hyperscale cloud providers, managed infrastructure and application hosting providers, and systems integrators. It is estimated thatEquinix is one of more than 1,200 companies that provide MTDC offerings around the world. Each of these data center solutions providers can bundle various colocation, interconnection and network offerings and outsourced IT infrastructure solutions. We are able to offer our customers a global platform that reaches 26 countries with the industry's largest and most active ecosystem of partners in our sites, proven operational reliability, improved application performance and a highly scalable set of offerings. The cabinet utilization rate represents the percentage of cabinet space billed versus total cabinet capacity, which is used to measure how efficiently we are managing our cabinet capacity. Our cabinet utilization rate varies from market to market among our IBX data centers across theAmericas , EMEA andAsia-Pacific regions. Our cabinet utilization rates were approximately 79% and 81%, respectively, as ofDecember 31, 2019 and 2018. Excluding the impact of our IBX data center expansion projects that have opened during the last 12 months, our cabinet utilization rate would have increased to approximately 82% as ofDecember 31, 2019 . 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 high power-demand customers. This increased power consumption has driven us 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 IBX data 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 IBX data center, which could have a negative impact on our ability to grow revenues, affecting our financial performance, operating results and cash flows. In 2019, we closed our Joint Venture with GIC to develop and operate xScale data centers to serve the needs of the growing hyperscale data center market, including the world's largest cloud service providers. Upon closing, the Joint Venture acquired certain data center facilities inEurope , with the opportunity to add additional facilities to the Joint Venture in the future. Strategically, we will continue to look at attractive opportunities to grow our market share and selectively improve our footprint and offerings. As was the case with our recent expansions and acquisitions, our expansion criteria will be dependent on a number of factors, including but not limited to demand from new and existing customers, quality of the design, power capacity, access to networks, clouds and software partners, capacity availability in the current market location, amount of incremental investment required by us in the targeted property, automation capabilities, developer 42
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talent pool, lead-time to break even on a free cash flow basis 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 toEquinix 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. Revenue: [[Image Removed: picture2recurringa04.jpg]] Our business is based on a recurring revenue model comprised of colocation and related interconnection and managed infrastructure offerings. We consider these offerings recurring because 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, more than 80% of our monthly recurring revenue bookings came from existing customers, contributing to our revenue growth. Our largest customer accounted for approximately 3% of our recurring revenues for the years endedDecember 31, 2019 , 2018 and 2017. Our 50 largest customers accounted for approximately 39%, 38% and 37%, respectively, of our recurring revenues for the years endedDecember 31, 2019 , 2018 and 2017. Our non-recurring revenues are primarily comprised of installation services related to a customer's initial deployment and professional services we perform. These services are considered to be non-recurring because they are billed typically once, upon completion of the installation or the 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 period of the contract term. Additionally, revenue from contract settlements, when a customer wishes to terminate their contract early, is generally treated as a contract modification and recognized ratably over the remaining term of the contract, if any. As a percentage of total revenues, we expect non-recurring revenues to represent less than 10% of total revenues for the foreseeable future. Operating Expenses: Cost of Revenues. The largest components of our cost of revenues are depreciation, rental payments related to our leased IBX data centers, utility costs, including electricity, bandwidth access, IBX data center employees' salaries and benefits, including stock-based compensation, repairs and maintenance, supplies and equipment and security. A 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 that 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 generally increase in the future on a per-unit or fixed basis, in addition to the variable increase related to the growth in consumption by our customers. 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 or other 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. 43
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Sales and Marketing. Our sales and marketing expenses consist primarily of compensation and related costs for sales and marketing personnel, including stock-based compensation, amortization of contract costs, marketing programs, public relations, promotional materials and travel, as well as bad debt expense and amortization of customer relationship intangible assets. General and Administrative. Our 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 on back office systems. Taxation as a REIT We elected to be taxed as a REIT forU.S. federal income tax purposes beginning with our 2015 taxable year. As ofDecember 31, 2019 , our REIT structure included all of our data center operations in theU.S. ,Canada ,Japan ,Singapore and the data center operations in EMEA with the exception ofBulgaria , theUnited Arab Emirates , and the data center operations outsideAmsterdam inthe Netherlands . Our data center operations in other jurisdictions are operated as TRSs. We included our interest in the Joint Venture in our REIT structure. As a REIT, we generally are permitted to deduct from ourU.S. taxable income the dividends we pay to our stockholders. The income represented by such dividends is not subject toU.S. federal income taxes at the entity level but is taxed, if at all, at the stockholder level. Nevertheless, the income of our TRSs which hold ourU.S. operations that may not be REIT compliant is subject toU.S. corporate federal and state income taxes, as applicable. Likewise, our foreign subsidiaries continue to be subject to foreign income taxes in jurisdictions in which they hold assets or conduct operations, regardless of whether held or conducted through TRSs or through QRSs. We are also subject to a separateU.S. federal corporate income tax on any gain recognized from a sale of a REIT asset where our basis in the asset is determined by reference to the basis of the asset in the hands of a C corporation (such as an asset held by us or a QRS following the liquidation or other conversion of a former TRS). This built-in-gains tax is generally applicable to any disposition of such an asset during the five-year period after the date we first owned the asset as a REIT asset to the extent of the built-in-gain based on the fair market value of such asset on the date we first held the asset as a REIT asset. If we fail to remain qualified forU.S. federal income taxation as a REIT, we will be subject toU.S. federal income taxes at regular corporate income tax rates. Even if we remain qualified forU.S. federal income taxation as a REIT, we may be subject to some federal, state, local and foreign taxes on our income and property in addition to taxes owed with respect to our TRSs' operations. In particular, while state income tax regimes often parallel theU.S. federal income tax regime for REITs, many states do not completely follow federal rules, and some may not follow them at all. We continue to monitor our REIT compliance in order to maintain our qualification forU.S. federal income taxation as a REIT. For this and other reasons, as necessary, we may convert some of our data center operations in other countries into the REIT structure in future periods. We converted our data center operations inSingapore into the REIT structure effectiveSeptember 30, 2019 . On each ofMarch 20 ,June 19 ,September 18 , andDecember 11, 2019 , we paid quarterly cash dividends of$2.46 per share. We expect these quarterly and other applicable distributions to equal or exceed the REIT taxable income that we recognized in 2019. 2019 Highlights: • In March, we issued and sold 2,985,575 shares of common stock for net
proceeds of approximately
commissions and offering expenses. See Note 12 within the Consolidated
Financial Statements.
• In April, we completed the acquisition of Switch Datacenters' AMS1 data
center business in Amsterdam, Netherlands (the "AM11 data center"), for a
cash purchase price of approximately €30.6 million, or approximately
million. See Note 3 within the Consolidated Financial Statements.
• In October, we closed our Joint Venture with GIC to develop and operate
xScale data centers in
facilities in
the Consolidated Financial Statements.
• In November, we issued $2.8 billion in Senior Notes due 2024, 2026 and
2029 with a weighted average interest rate of 2.93% and redeemed $1.9 billion in Senior Notes due 2022, 2023 and 2025 with a weighted average
interest rate of 5.47% in November and
the Consolidated Financial Statements.
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• By the end of December, we had sold 903,555 shares of our common stock for
approximately
and other offering expenses, under our current ATM program. See Note 12
within the Consolidated Financial Statements.
Results of Operations
Our results of operations for the year ended December 31, 2019 include the
results of operations from the acquisition of the AM11 data center from April
18, 2019 within the EMEA region. Our results of operations for the year ended
December 31, 2018 include the results of operations from the acquisition of
Metronode from April 18, 2018 within the Asia-Pacific region and the acquisition
of Infomart Dallas from April 2, 2018 within the Americas region.
Our results of operations for the year ended December 31, 2019 reflect the
adoption of Topic 842, Leases, while the comparative information has not been
restated and continues to be reported under the lease accounting standard in
effect for those periods. See Note 1 within the Consolidated Financial
Statements for further discussion.
In order to provide a framework for assessing our performance excluding the
impact of foreign currency fluctuations, we supplement the year-over-year actual
change in operating results with comparative changes on a constant currency
basis. Presenting constant currency results of operations is a non-GAAP
financial measure. See "Non-GAAP Financial Measures" below for further
discussion.
Years ended December 31, 2019 and 2018
Revenues. Our revenues for the years ended December 31, 2019 and 2018 were
generated from the following revenue classifications and geographic regions
(dollars in thousands):
Years Ended December 31, % Change
2019 % 2018 % Actual Constant Currency
Americas :
Recurring revenues $ 2,456,368 44% $ 2,357,326 46% 4% 5%Non-recurring revenues 131,359 3% 127,408 3% 3%
4%
2,587,727 47% 2,484,734 49% 4% 5%
EMEA:
Recurring revenues 1,680,746 30% 1,467,492 29% 15% 12%Non-recurring revenues 125,698 2% 95,145 2% 32%
39%
1,806,444 32% 1,562,637 31% 16% 14%
Asia-Pacific :
Recurring revenues 1,101,072 20% 951,684 19% 16% 17%Non-recurring revenues 66,897 1% 72,599 1% (8)%
(6)%
1,167,969 21% 1,024,283 20% 14% 16%
Total:
Recurring revenues 5,238,186 94% 4,776,502 94% 10% 10%Non-recurring revenues 323,954 6% 295,152 6% 10%
13%
$ 5,562,140 100% $ 5,071,654 100% 10% 10%
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Revenues
(dollars in thousands)[[Image Removed: chart-b8073a27e85a7680e77.jpg]][[Image Removed: chart-c3df643c625c3f0469a.jpg]][[Image Removed: chart-12b091f7f943c177459.jpg]]
[[Image Removed: capture1.jpg]]
Americas Revenues. During the year ended December 31, 2019 , Americas revenue
increased by 4% (5% on a constant currency basis). Growth in Americas revenues
was primarily due to:
• approximately $10.6 million of incremental revenues from the Infomart
•
IBX data centers or IBX data center expansions; and
• an increase in orders from both our existing customers and new customers
during the period.
EMEA Revenues. During the year endedDecember 31, 2019 , EMEA revenue increased by 16% (14% on a constant currency basis). Growth in EMEA revenues was primarily due to: • approximately$76.0 million of incremental revenues generated from our recently-opened IBX data centers or IBX data center expansions;
• an increase in orders from both our existing customers and new customers
during the period; and
• a net increase of $110.6 million of realized cash flow hedge gains from
foreign currency forward contracts.
Asia-Pacific Revenues. During the year ended December 31, 2019 , Asia-Pacific
revenue increased by 14% (16% on a constant currency basis). Growth in
Asia-Pacific revenue was primarily due to:
• approximately $16.6 million of incremental revenues from the Metronode
acquisition;
• approximately $35.4 million of incremental revenues generated from our
recently-opened IBX data centers or IBX data center expansions; and
• an increase in orders from both our existing customers and new customers
during the period.
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Cost of Revenues. Our cost of revenues for the years ended
Years Ended December 31, % Change
2019 % 2018 % Actual Constant Currency
Americas $ 1,146,639 41% $ 1,113,854 43% 3% 4%
EMEA 1,017,580 36% 916,751 35% 11% 12%
Asia-Pacific 645,965 23% 574,870 22% 12% 14%
Total $ 2,810,184 100% $ 2,605,475 100% 8% 9%
Cost of Revenues
(dollars in thousands; percentages indicate expenses as a percentage of
revenues)
[[Image Removed: chart-9e2b1bce652f89a8ee7a10.jpg]][[Image Removed: chart-1e4cc6a3f45c4362g08.jpg]][[Image Removed: chart-ee03119452bf33beef0a10.jpg]]
Americas Cost of Revenues. During the year ended December 31, 2019 , Americas
cost of revenues increased by 3% (4% on a constant currency basis). The increase
in our Americas cost of revenues was primarily due to:
• $11.3 million of higher utilities costs driven by IBX data center
expansions, increased utility usage and utility price increases;
•$10.0 million of higher bandwidth costs in support of our business growth; • approximately$9.9 million of incremental cost of revenues from the Infomart Dallas acquisition;
•
and stock-based compensation; and
•
activity.
This increase was partially offset by:
•
releases based on tax appeal settlements; and
•
EMEA Cost of Revenues. During the year endedDecember 31, 2019 , EMEA cost of revenues increased by 11% (12% on a constant currency basis). The increase in our EMEA cost of revenues was primarily due to: • a net increase of$40.6 million of realized cash flow hedge losses from foreign currency forward contracts;
•
to support IBX data center expansions and utility price increases,
primarily in Germany , the Netherlands and the United Kingdom ;
•
primarily in Germany and the United Kingdom ;
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•
expansions in
•
stock-based compensation and headcount growth.
This increase was partially offset by: •$5.9 million of reduced outside services consulting expenses.
Asia-Pacific Cost of Revenues. During the year ended
primarily driven by expansions and higher utility usage in
•
center expansions in
• approximately
•
This increase was partially offset by:
•
the current period as compared to the prior year.
We expect
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Sales and Marketing Expenses. Our sales and marketing expenses for the years
ended
Years ended December 31, % Change
2019 % 2018 % Actual Constant Currency
Americas $ 401,034 62% $ 391,386 62% 2% 3%
EMEA 157,718 24% 152,336 24% 4% 4%
Asia-Pacific 92,294 14% 89,980 14% 3% 4%
Total $ 651,046 100% $ 633,702 100% 3% 3%
Sales and Marketing Expenses
(dollars in thousands; percentages indicate expenses as a percentage of
revenues)
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Americas Sales and Marketing Expenses. During the year ended December 31, 2019 ,
Americas sales and marketing expenses increased by 2% (3% on a constant currency
basis). The increase in our Americas sales and marketing expenses was primarily
due to:
• $7.4 million of higher compensation costs, including sales compensation,
salaries and stock-based compensation and headcount growth; and
•
EMEA Sales and Marketing Expenses. During the year endedDecember 31, 2019 , EMEA sales and marketing increased by 4% (and also 4% on a constant currency basis). The increase in our EMEA sales and marketing expenses was primarily due to: • a net increase of$7.2 million of realized cash flow hedge losses from foreign currency forward contracts; and
•
salaries and stock-based compensation and headcount growth.
This increase was partially offset by:
•
being fully amortized in the current year.
Asia-Pacific Sales and Marketing Expenses. OurAsia-Pacific sales and marketing expense did not materially change during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . 49
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We anticipate that we will continue to invest inAmericas , EMEA andAsia-Pacific sales and marketing initiatives and expect ourAmericas , EMEA andAsia-Pacific sales and marketing expenses to increase as we grow our business. Additionally, given that certain global sales and marketing functions are located within theU.S. , we expectAmericas sales and marketing expenses as a percentage of revenues to be higher than our other regions. General and Administrative Expenses. Our general and administrative expenses for the years endedDecember 31, 2019 and 2018 were split among the following geographic regions (dollars in thousands): Years Ended December 31, % Change 2019 % 2018 % Actual Constant Currency Americas$ 641,261 69%$ 554,169 67% 16% 16% EMEA 198,892 21% 184,364 22% 8% 7% Asia-Pacific 94,865 10% 88,161 11% 8% 9% Total$ 935,018 100%$ 826,694 100% 13% 13%
General and Administrative Expenses
(dollars in thousands; percentages indicate expenses as a percentage of
revenues)
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Americas General and Administrative Expenses. During the year ended December 31,
2019 , Americas general and administrative expenses increased by 16% (and also
16% on a constant currency basis). The increase in our Americas general and
administrative expenses was primarily due to:
• $51.1 million of higher compensation costs, including salaries, bonuses,
stock-based compensation, and headcount growth;
• $22.3 million of higher depreciation expense associated with theimplementation of certain systems to support the integration and growth of
our business; and
•
EMEA General and Administrative Expenses. During the year endedDecember 31, 2019 , EMEA general and administrative expenses increased by 8% (7% on a constant currency basis). The increase in our EMEA general and administrative expenses was primarily due to: • a net increase of$8.8 million of realized cash flow hedge losses from foreign currency forward contracts; and
•
stock-based compensation and headcount growth.
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Asia-Pacific General and Administrative Expenses. During the year endedDecember 31, 2019 ,Asia-Pacific general and administrative expenses increased by 8% (9% on a constant currency basis). The increase in ourAsia-Pacific general and administrative expense was primarily due to: •$3.8 million of higher compensation costs, including salaries, bonuses,
stock-based compensation and headcount growth.
Going forward, although we are carefully monitoring our spending, we expectAmericas , EMEA andAsia-Pacific general and administrative expenses to increase as we continue to further scale our operations to support our growth, including investments in our back office systems and investments to maintain our qualification for taxation as a REIT and to integrate recent acquisitions. Additionally, given that our corporate headquarters is located within theU.S. , we expectAmericas general and administrative expenses as a percentage of revenues to be higher than our other regions. Transaction Costs. During the year endedDecember 31, 2019 , we recorded transaction costs totaling$24.8 million primarily related to costs incurred in connection with the formation of the new Joint Venture in the EMEA region. During the year endedDecember 31, 2018 , we recorded transaction costs totaling$34.4 million , primarily in theAsia-Pacific andAmericas regions, due to our acquisitions ofMetronode and Infomart Dallas. Impairment Charges. During the year endedDecember 31, 2019 , we recorded impairment charges totaling$15.8 million in theAmericas region primarily as a result of the fair value adjustment for theNew York 12 ("NY12") data center, which was classified as a held for sale asset before it was sold inOctober 2019 . We did not have impairment charges during the year endedDecember 31, 2018 . Gain on Asset Sales. During the year endedDecember 31, 2019 , we recorded a gain on asset sales of$44.3 million primarily relating to the sale of both theLondon 10 andParis 8 data centers, as well as certain construction development and leases inLondon andFrankfurt , as part of the closing of the Joint Venture. During the year endedDecember 31, 2018 , we recorded gain on asset sales of$6.0 million primarily relating to the sale of a data center inFrankfurt . Income from Operations. Our income from operations for the years endedDecember 31, 2019 and 2018 was split among the following geographic regions (dollars in thousands): Years Ended December 31, % Change 2019 % 2018 % Actual Constant Currency Americas$ 413,936 35%$ 412,610 42% -% 1% EMEA 421,786 36% 312,163 32% 35% 24% Asia-Pacific 333,909 29% 252,610 26% 32% 35% Total$ 1,169,631 100%$ 977,383 100% 20% 17% Americas Income from Operations. OurAmericas income from operations did not materially change during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 . EMEA Income from Operations. During the year endedDecember 31, 2019 , EMEA income from operations increased by 35% (24% on a constant currency basis). The increase in our EMEA income from operations was primarily due to higher revenues as a result of our IBX data center expansion activity and organic growth, as described above, as well as lower operating expenses as a percentage of revenues. Asia-Pacific Income from Operations. During the year endedDecember 31, 2019 ,Asia-Pacific income from operations increased by 32% (35% on a constant currency basis). The increase in ourAsia-Pacific income from operations was primarily due to higher revenues as a result of our IBX data center expansion activity, acquisition and organic growth as described above, lower operating expenses as a percentage of revenues and lower transaction costs in the current period as compared to the prior year. Interest Income. Interest income was$27.7 million and$14.5 million for the years endedDecember 31, 2019 and 2018, respectively. The average yield for the year endedDecember 31, 2019 was 1.85% versus 1.24% for the year endedDecember 31, 2018 . Interest Expense. Interest expense decreased to$479.7 million for the year endedDecember 31, 2019 from$521.5 million for the year endedDecember 31, 2018 , primarily attributable to the reduction in lease interest expense 51
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due to the conversion of certain build-to-suit leases to operating leases upon the adoption of ASC 842 and the utilization of cross-currency interest rate swaps in 2019. During the years endedDecember 31, 2019 and 2018, we capitalized$32.2 million and$19.9 million , respectively, of interest expense to construction in progress. Other Income. We recorded net other income of$27.8 million and$14.0 million for the years endedDecember 31, 2019 and 2018, respectively. Other income is primarily comprised of foreign currency exchange gains and losses during the periods. Loss on Debt Extinguishment. During the year endedDecember 31, 2019 , the Company recorded$52.8 million of loss on debt extinguishment primarily related to the loss on debt extinguishment from the redemption of the Senior Notes due 2022, 2023 and 2025. During the year endedDecember 31, 2018 , the Company recorded$51.4 million of loss on debt extinguishment comprised of: •$17.1 million of loss on debt extinguishment as a result of amendments to leases impacting the related financing obligations; •$19.5 million of loss on debt extinguishment from the settlement of
financing obligations as a result of the Infomart Dallas acquisition;
•
of financing obligations for properties purchased; and
•
of the Japanese Yen Term Loan.
Income Taxes. We operate as a REIT forU.S. federal income tax purposes. As a REIT, we are generally not subject toU.S. federal and state income taxes on our taxable income distributed to stockholders. We intend to distribute or have distributed the entire taxable income generated by the operations of our REIT and QRSs for the tax years endedDecember 31, 2019 and 2018, respectively. As such, other than tax attributable to built-in-gains recognized and withholding taxes, no provision forU.S. federal income taxes for the REIT and QRSs has been included in the accompanying consolidated financial statements for the years endedDecember 31, 2019 and 2018. We have made TRS elections for some of our subsidiaries in and outside theU.S. In general, a TRS may provide services that would otherwise be considered impermissible for REITs to provide and may hold assets that may not be REIT compliant.U.S. federal income taxes for the TRS entities located in theU.S. and foreign income taxes for our foreign operations regardless of whether the foreign operations are operated as QRSs or TRSs have been accrued, as necessary, for the years endedDecember 31, 2019 and 2018. For the years endedDecember 31, 2019 and 2018, we recorded$185.4 million and$67.7 million of income tax expenses, respectively. Our effective tax rates were 26.8% and 15.6%, respectively, for the years endedDecember 31, 2019 and 2018. The higher effective tax rate in 2019 as compared to 2018 is primarily due to a release of valuation allowance in 2018 as a result of a legal entity reorganization in ourAmericas region. Adjusted EBITDA. Adjusted EBITDA is a key factor in how we assess the operating performance of our segments and develop regional growth strategies such as IBX data center expansion decisions. We define adjusted EBITDA as income or loss from operations excluding depreciation, amortization, accretion, stock-based compensation expense, restructuring charges, impairment charges, transaction costs and gain on asset sales. See "Non-GAAP Financial Measures" below for more information about adjusted EBITDA and a reconciliation of adjusted EBITDA to income or loss from operations. Our adjusted EBITDA for the years endedDecember 31, 2019 and 2018 was split among the following geographic regions (dollars in thousands): Years Ended December 31, % Change 2019 % 2018 % Actual Constant Currency Americas$ 1,237,622 46 %$ 1,183,831 49 % 5 % 5 % EMEA 827,980 31 % 698,280 29 % 19 % 17 % Asia-Pacific 622,125 23 % 531,129 22 % 17 % 19 % Total$ 2,687,727 100 %$ 2,413,240 100 % 11 % 12 % 52
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Americas Adjusted EBITDA. During the year endedDecember 31, 2019 ,Americas adjusted EBITDA increased by 5% (and also 5% on a constant currency basis). The increase in ourAmericas adjusted EBITDA was primarily due to higher revenues as a result of our IBX data center expansion activity, acquisition and organic growth as described above. EMEA Adjusted EBITDA. During the year endedDecember 31, 2019 , EMEA adjusted EBITDA increased by 19% (17% on a constant currency basis). The increase in our EMEA adjusted EBITDA was primarily due to higher revenues as a result of our IBX data center expansion activity and organic growth, as described above, as well as lower operating expenses as a percentage of revenues. Asia-Pacific Adjusted EBITDA. During the year endedDecember 31, 2019 ,Asia-Pacific adjusted EBITDA increased by 17% (19% on a constant currency basis). The increase in ourAsia-Pacific adjusted EBITDA was primarily due to higher revenues as a result of our IBX data center expansion activity, acquisition and organic growth as described above and lower operating expenses as a percentage of revenues. Non-GAAP Financial Measures We provide all information required in accordance with 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 to evaluate our operations. Non-GAAP financial measures are not a substitute for financial information prepared in accordance with GAAP. Non-GAAP financial measures should not be considered in isolation, but should be considered together with the most directly comparable GAAP financial measures and the reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures. 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 these non-GAAP financial measures provides consistency and comparability with past reports and provides a better understanding of the overall performance of the business and 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 analyzeEquinix effectively. Investors should note 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 those of other companies. Investors should therefore exercise caution when comparing non-GAAP financial measures used by us to similarly titled non-GAAP financial measures of other companies. Our primary non-GAAP financial measures, adjusted EBITDA and adjusted funds from operations ("AFFO"), 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 an IBX data center do not recur with respect to such data center, although we may incur initial construction costs in future periods with respect to additional IBX data centers, 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. 53
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In addition, in presenting adjusted EBITDA and AFFO, we exclude amortization
expense related to acquired intangible assets. Amortization expense is
significantly affected by the timing and magnitude of our acquisitions and these
charges may vary in amount from period to period. We exclude amortization
expense to facilitate a more meaningful evaluation of our current operating
performance and comparisons to our prior periods. 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
stock-based compensation expense, as it can vary significantly from period to
period based on share price, the timing, size and nature of equity awards. As
such, we, and many investors and analysts, exclude stock-based compensation
expense to compare our operating results with those of other companies. We also
exclude restructuring charges. 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. We also exclude impairment charges related to certain
long-lived assets. The impairment charges are related to expense recognized
whenever events or changes in circumstances indicate that the carrying amount of
long-lived assets are not recoverable. We also exclude gain or loss on asset
sales as it represents profit or loss that is not meaningful in evaluating the
current or future operating performance. Finally, we exclude transaction costs
from AFFO and adjusted EBITDA to allow more comparable comparisons of our
financial results to our historical operations. The transaction costs relate to
costs we incur in connection with business combinations and the formation of
joint ventures, including advisory, legal, accounting, valuation, and other
professional or consulting fees. Such charges generally are not relevant to
assessing the long-term performance of the company. In addition, the frequency
and amount of such charges vary significantly based on the size and timing of
the transactions. Management believes items such as restructuring charges,
impairment charges, gain or loss on asset sales and transaction costs are
non-core transactions; however, these types of costs may occur in future
periods.
Adjusted EBITDA
We define adjusted EBITDA as income from operations excluding depreciation,
amortization, accretion, stock-based compensation expense, restructuring
charges, impairment charges, transaction costs, and gain on asset sales as
presented below (in thousands):
Years Ended December 31,
2019 2018 2017
Income from operations $ 1,169,631 $ 977,383 $ 809,014
Depreciation, amortization, and accretion expense 1,285,296 1,226,741 1,028,892
Stock-based compensation expense 236,539 180,716 175,500
Transaction costs 24,781 34,413 38,635
Impairment charges 15,790 - -
Gain on asset sales (44,310 ) (6,013 ) -
Adjusted EBITDA $ 2,687,727 $ 2,413,240 $ 2,052,041
Our adjusted EBITDA results have improved each year and in each region in total
dollars 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 also discussed earlier in "Overview".
Funds from Operations ("FFO") and AFFO
We use FFO and AFFO, which are non-GAAP financial measures commonly used in the
REIT industry. FFO is calculated in accordance with the standards established by
the National Association of Real Estate Investment Trusts . FFO represents net
income (loss), excluding gain (loss) from the disposition of real estate assets,
depreciation and amortization on real estate assets and adjustments for
unconsolidated joint ventures' and non-controlling interests' share of these
items.
In presenting AFFO, we exclude certain items that we believe are not good
indicators of our current or future operating performance. AFFO represents FFO
excluding depreciation and amortization expense on non-real estate assets,
accretion, stock-based compensation, restructuring charges, impairment charges,
transaction costs, an installation revenue adjustment, a straight-line rent
expense adjustment, a contract cost adjustment, amortization of deferred
financing costs and debt discounts and premiums, gain (loss) on debt
extinguishment, an income tax expense adjustment, recurring capital
expenditures, net income (loss) from discontinued operations, net of tax, and
adjustments
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from FFO to AFFO for unconsolidated joint ventures' and noncontrolling
interests' share of these items. The adjustments for installation revenue,
straight-line rent expense and contract costs are intended to isolate the cash
activity included within the straight-lined or amortized results in the
consolidated statement of operations. We exclude the amortization of deferred
financing costs and debt discounts and premiums as these expenses relate to the
initial costs incurred in connection with debt financings that have no current
or future cash obligations. We exclude gain (loss) on debt extinguishment since
it generally represents the write-off of initial costs incurred in connection
with debt financings or a cost that is incurred to reduce future interest costs
and is not a good indicator of our current or future operating performance. We
include an income tax expense adjustment, which represents the non-cash tax
impact due to changes in valuation allowances, uncertain tax positions and
deferred taxes that do not relate to current period's operations. We deduct
recurring capital expenditures, which represent expenditures to extend the
useful life of its IBX data centers or other assets that are required to support
current revenues. We also exclude net income (loss) from discontinued
operations, net of tax, which represents results that may not recur and are not
a good indicator of our current future operating performance.
Our FFO and AFFO were as follows (in thousands):
Years Ended December 31,
2019 2018 2017
Net income $ 507,245 $ 365,359 $ 232,982
Net loss attributable to non-controlling
interests 205 - -
Net income attributable to Equinix 507,450 365,359 232,982
Adjustments:
Real estate depreciation 845,798 883,118
754,351
(Gain) loss on disposition of real estate property (39,337 ) 4,643
4,945
Adjustments for FFO from unconsolidated joint ventures 645 - 85 FFO$ 1,314,556 $ 1,253,120 $ 992,363 Years Ended December 31, 2019 2018 2017 FFO$ 1,314,556 $ 1,253,120 $ 992,363 Adjustments: Installation revenue adjustment 11,031 10,858
24,496
Straight-line rent expense adjustment 8,167 7,203
8,925
Contract cost adjustment (40,861 ) (20,358 ) - Amortization of deferred financing costs and debt discounts and premiums 13,042 13,618
24,449
Stock-based compensation expense 236,539 180,716
175,500
Non-real estate depreciation expense 242,761 140,955
111,121
Amortization expense 196,278 203,416
177,008
Accretion expense (adjustment) 459 (748 ) (13,588 ) Recurring capital expenditures (186,002 ) (203,053 ) (167,995 ) Loss on debt extinguishment 52,825 51,377 65,772 Transaction costs 24,781 34,413 38,635 Impairment charges 15,790 - - Income tax expense adjustment 39,676 (12,420 ) 371 Adjustments for AFFO from unconsolidated joint ventures 2,080 - (17 ) AFFO$ 1,931,122 $ 1,659,097 $ 1,437,040 Our AFFO results have improved due to the improved operating results discussed earlier in "Results of Operations," as well as due to the nature of our business model which consists of a recurring revenue stream and a cost structure which has a large base that is fixed in nature as discussed earlier in "Overview." 55
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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 theU.S. dollar against major international currencies. During the year endedDecember 31, 2019 as compared to the same period in 2018, theU.S. dollar was stronger relative to the Brazilian real, Euro, British Pound,Singapore dollar and Australian dollar, which resulted in an unfavorable foreign currency impact on revenue, operating income and adjusted EBITDA, and a favorable foreign currency impact on operating expenses. In order to provide a framework for assessing how each of our business segments performed excluding the impact of foreign currency fluctuations, we present period-over-period percentage changes in our revenues and certain operating expenses on a constant currency basis in addition to the historical amounts as reported. Our constant currency presentation excludes the impact of our foreign currency cash flow hedging activities. 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 period revenues and certain operating expenses from entities reporting in currencies other than theU.S. dollar are converted intoU.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 endedDecember 31, 2018 are used as exchange rates for the year endedDecember 31, 2019 when comparing the year endedDecember 31, 2019 with the year endedDecember 31, 2018 ). Liquidity and Capital Resources As ofDecember 31, 2019 , our total indebtedness was comprised of debt and lease obligations totaling approximately$11.9 billion (gross of debt issuance cost, debt discount, plus mortgage premium) consisting of: • approximately$9,029.2 million of principal from our senior notes;
• approximately
•
We believe we have sufficient cash, coupled with anticipated cash generated from operating activities, to meet our operating requirements, including repayment of the current portion of our debt as it becomes due, payment of regular dividend distributions and completion of our publicly-announced expansion projects. During 2019, we completed the following significant financing activities: • issued$2,800.0 million in Senior Notes due 2024, 2026 and 2029;
• redeemed
• repaid
repayment terms;
• issued and sold 2,985,575 shares of common stock in a public equity
offering and received net proceeds of approximately
of underwriting discounts, commissions and offering expenses; and
• issued and sold 903,555 shares of common stock under our ATM Program, for
proceeds of approximately
sales agents and other offering expenses.
As ofDecember 31, 2019 , we had$1,879.9 million of cash, cash equivalents and short-term investments, of which approximately$1,456.8 million was held in theU.S. In addition to our cash and investment portfolio, we had$1.9 billion of additional liquidity available to us from our$2.0 billion revolving facility and$300.0 million of shares issuance available for sale under our ATM Program. Besides any further financing activity 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. Additionally, 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 and joint ventures. While we expect to fund these plans with our existing resources, additional financing, either debt or equity, may be required, and if current market conditions were to deteriorate, we 56
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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
Years Ended December 31,
2019 2018
(in thousands)
Net cash provided by operating activities
Operating Activities Our cash provided by our operations is generated by colocation, interconnection, managed infrastructure and other revenues. Our primary uses of cash from our operating activities include compensation and related costs, interest payments, other general corporate expenditures and taxes. The increase in net cash provided by operating activities during 2019 compared to 2018 was primarily due to improved operating results combined with the inclusion of full year operating results of the acquisitions of Infomart Dallas andMetronode closed inApril 2018 , offset by increases in cash paid for cost of revenues, operating expenses, interest expense and income taxes. Investing Activities The decrease in net cash used in investing activities during 2019 compared to 2018 was primarily due to the decrease in spending for business acquisitions of approximately$795.5 million , primarily due to theMetronode and Infomart Dallas acquisitions in 2018 combined with an increase in proceeds from asset sales of approximately$346.6 million , primarily due to the sale of xScale data center facilities in connection with the closing of the Joint Venture. During 2020, we anticipate our IBX expansion construction activity will increase from our 2019 levels. If the opportunity to expand is greater than planned and we have sufficient funding to pursue such expansion opportunities, we may further increase the level of capital expenditure to support this growth as well as pursue additional business and real estate acquisitions or joint ventures. Financing Activities Net cash provided by financing activities during 2019 was primarily due to: • the issuance of$2,800.0 million in Senior Notes due 2024, 2026 and 2029;
• the sale and issuance of 2,985,575 shares of common stock in a public
equity offering and receipt of net proceeds of approximately
million, net of underwriting discounts, commissions and offering expenses;
• the sale of 903,555 shares under our ATM Program, for net proceeds of
$447.5 million ; and
• proceeds from employee awards of
The proceeds were partially offset by:
• the redemption of
• the repayment of
the repayment terms;
• dividend distributions of
• repayments of capital lease and other financing obligations totaling
• repayments of mortgage and loans payable totaling
• payments of debt extinguishment costs of
to redemption premium paid related to the redemption of Senior Notes due
2022, 2023 and 2025; and
• payments of debt issuance costs of
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Net cash provided by financing activities during 2018 was primarily due to: • the issuance of €750.0 million 2.875% Euro Senior Notes due 2024, or
approximately $929.9 million in U.S. dollars, at the exchange rate in
effect on March 14, 2018 ;
• borrowing of the JPY Term Loan of ¥47.5 billion, or approximately
million at the exchange rate effective on July 31, 2018 ;
• the sale of 930,934 shares under our ATM Program, for net proceeds of
$388.2 million ; and
• proceeds from employee awards of
The proceeds were partially offset by: • dividend distributions of$738.6 million ;
• repayments of capital lease and other financing obligations of
• repayments of mortgage and loans payable of
related to the prepayment of the remaining principal of our existing
Japanese Yen Term Loan;
• payments of debt extinguishment costs of
• payments of debt issuance costs of
Contractual Obligations and Off-Balance-Sheet Arrangements We lease a majority of our IBX data centers and certain equipment under long-term lease agreements. The following represents our debt maturities, financings, leases and other contractual commitments as ofDecember 31, 2019 (in thousands): 2020 2021 2022 2023 2024 Thereafter Total Term loans and other loans payable (1)$ 77,603 $ 77,654 $ 1,180,017 $ 6,683 $ 6,214 $ 23,715 $ 1,371,886 Senior notes (1) 643,711 150,000 - - 1,841,500 6,394,000 9,029,211 Interest (2) 359,383 333,710 327,222 303,722 291,496 574,633 2,190,166 Finance leases (3) 173,994 176,357 176,992 178,289 177,338 1,739,235 2,622,205 Operating leases (3) 193,663 191,954 183,908 168,353 156,502 1,106,944 2,001,324 Other contractual commitments (4) 1,133,948 256,508 51,137 33,587 30,267 277,739 1,783,186 Asset retirement obligations (5) 2,081 4,667 12,365 5,442 6,978 70,882 102,415$ 2,584,383 $ 1,190,850 $ 1,931,641 $ 696,076 $ 2,510,295 $ 10,187,148 $ 19,100,393
(1) Represents principal of senior notes, term loans and other loans payable, as
well as premium on mortgage payable.
(2) Represents interest on mortgage payable, senior notes, term loan facilities
and other loans payable based on their approximate interest rates as of
credit facility.
(3) Represents lease payments under finance and operating lease arrangements,
including renewal options that are certain to be exercised.
(4) Represents unaccrued contractual commitments. Other contractual commitments
are described below.
(5) Represents liability, net of future accretion expense.
In connection with certain of our leases and other contracts requiring deposits,
we entered into 41 irrevocable letters of credit totaling $84.0 million under
the revolving credit facility. These letters of credit were provided in lieu of
cash deposits. If the landlords for these IBX leases decide to draw down on
these letters of credit triggered by an event of default under the lease, we
will be required to fund these letters of credit either through cash collateral
or borrowing under the revolving credit facility. These contingent commitments
are not reflected in the table above.
We had accrued liabilities related to uncertain tax positions totaling
approximately $132.2 million as of December 31, 2019 . These liabilities, which
are reflected on our balance sheet, are not reflected in the table above since
it is unclear when these liabilities will be paid.
Primarily as a result of our various IBX data center expansion projects, as of
December 31, 2019 , we were contractually committed for $795.0 million of
unaccrued capital expenditures, primarily for IBX equipment not yet delivered
and labor not
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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 2020 and thereafter, is reflected in the table above as "other contractual commitments." We had other non-capital purchase commitments in place as ofDecember 31, 2019 , such as commitments to purchase power in select locations and other open purchase orders, which contractually bind us for goods, services or arrangements to be delivered or provided during 2020 and beyond. Such other purchase commitments as ofDecember 31, 2019 , which total$988.2 million , are also reflected in the table above as "other contractual commitments." In connection with the Joint Venture which closed inOctober 2019 , we agreed to make future equity contributions to the Joint Venture of €17.6 million and £15.7 million, or$40.6 million in total at the exchange rate in effect onDecember 31, 2019 , to fund the Joint Venture's future development over the next 3 years, which are not reflected in the table above. Additionally, we entered into lease agreements with various landlords primarily for data center spaces and ground leases which have not yet commenced as ofDecember 31, 2019 . These leases will commence between fiscal years 2020 and 2022, with lease terms of 10 to 49 years and total lease commitments of approximately$608.1 million , which are not reflected in the table above. 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. As ofDecember 31, 2019 , there were no significant liabilities recorded for these arrangements. For additional information, see "Guarantor Arrangements" in Note 15 within the Consolidated Financial Statements. Concurrent with the closing of the Joint Venture, the Joint Venture entered into a credit agreement with a group of lenders for secured credit facilities of €850.0 million, or$953.7 million in total at the exchange rate in effect onDecember 31, 2019 , consisting of two secured term loan facilities and a secured revolving credit facility. The Joint Venture's debt is secured by net assets of the Joint Venture, is without recourse to the partners, and does not represent a liability of the partners. We do not provide any guarantees to make principle payment to the lenders for the Joint Ventures' indebtedness. Under the Joint Venture agreement, we and our joint venture partner GIC are also required to make additional equity contribution proportionately to the Joint Venture upon situations such as interest shortfall, cost-overrun or capital shortfall to complete certain construction phases. Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance withU.S. 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 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 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;
• Accounting for property, plant and equipment; and
• Accounting for leases.
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Judgments and Effect if Actual Results
Description Uncertainties Differ from Assumptions
Accounting for Income The valuation of deferred As of December 31, 2019 and
Taxes. tax assets requires 2018, we had net total
judgment in assessing the deferred tax liabilities of
Deferred tax assets and likely future tax $211.4 million and $189.6
liabilities are consequences of events million, respectively. As of
recognized based on the that have been recognized December 31, 2019 and 2018, we
future tax consequences in our financial had a total valuation
attributable to statements or tax returns. allowance of $57.8 million and
temporary differences Our accounting for $57.0 million , respectively.
that exist between the deferred tax consequences If and when we reduce our
financial statement represents our best remaining valuation
carrying value of estimate of those future allowances, it may have a
assets and liabilities tax consequences. favorable impact to our
and their respective financial position and results
tax bases, and In assessing the need for of operations in the periods
operating loss and tax a valuation allowance, we when such determinations are
credit carryforwards on consider both positive and made. We will continue to
a taxing jurisdiction negative evidence related assess the need for our
basis. We measure to the likelihood of valuation allowances, by
deferred tax assets and realization of the jurisdiction, in the future.
liabilities using deferred tax assets. If,
enacted tax rates that based on the weight of During the year ended December
will apply in the years that available evidence, 31, 2019, we released the full
in which we expect the it is more likely than not valuation allowances against
temporary differences the deferred tax assets the deferred tax assets of one
to be recovered or will not be realized, we of our Brazilian legal
settled. record a valuation entities due to the evidence
allowance. The weight of achieving sustainable
The accounting standard given to the positive and profitability. For the
for income taxes negative evidence is Metronode Acquisition, we
requires a reduction of commensurate with the increased the valuation
the carrying amounts of extent to which the allowance that was assessed in
deferred tax assets by evidence may be prior year as a result of
recording a valuation objectively verified. finalizing the provisional allowance if, based on
estimates related to the
the available evidence, This assessment, which is realizability of certain
it is more likely than completed on a taxing deferred tax assets.
not (defined by the jurisdiction basis, takes
accounting standard as into account a number of During the year ended December
a likelihood of more types of evidence, 31, 2018, we released the full
than 50%) that such including the following: or partial valuation
assets will not be 1) the nature, frequency allowances against the
realized. and severity of current deferred tax assets in certain
and cumulative financial jurisdictions in the A tax benefit from an reporting losses, 2) Asia-Pacific and EMEA regions. uncertain income tax sources of future taxable As part of the purchase position may be income and 3) tax planning accounting determination for recognized in the strategies. the Metronode Acquisition, we financial statements provided full valuation only if it is more In assessing the tax allowance against certain likely than not that benefit from an uncertain deferred tax assets in the position is income tax position, the Australia that are not sustainable, based tax position that meets expected to be realizable in solely on its technical the more-likely-than-not the foreseeable future. merits and recognition threshold is consideration of the initially and subsequently As of December 31, 2019 and relevant taxing measured as the largest 2018, we had unrecognized tax authority's widely amount of tax benefit that benefits of$173.7 million and understood is greater than 50% likely$150.9 million , respectively, administrative of being realized upon exclusive of interest and practices and ultimate settlement with a penalties. During the year precedents. The Company taxing authority that has endedDecember 31, 2019 , the recognizes interest and full knowledge of all unrecognized tax benefit penalties related to relevant information. increased by$22.8 million unrecognized tax primarily due to
integrations,
benefits within income For purposes of the which was partially offset by
tax benefit (expense) quarterly REIT asset the recognition of
in the consolidated tests, we estimate the unrecognized tax benefits
statements of fair market value of related to the Company's tax
operations. assets within our QRSs and positions in France as a
TRSs using a discounted result of a lapse in statutes
cash flow approach, by of limitations and the partial
calculating the present payment of the Metronode
value of forecasted future pre-acquisition tax audit
cash flows. We apply assessment which was fully
discount rates based on indemnified by the seller.
industry benchmarks During the year ended December
relative to the market and 31, 2018, the unrecognized tax
forecasting risks. Other benefits increased by $68.5
significant assumptions million primarily due to the
used to estimate the fair Metronode Acquisition and the
market value of assets in reorganization of the Spanish
QRSs and TRSs include entities from the Itconic
projected revenue growth, acquisition. The unrecognized
projected operating tax benefits of $173.7 million
margins and projected as of December 31, 2019, if
capital expenditure. We subsequently recognized, will
revisit significant affect our effective tax rate
assumptions periodically favorably at the time when
to reflect any changes due such a benefit is recognized,
to business or economic of which $30.8 million is
environment. subject to an indemnification
agreement.
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Judgments and Effect if Actual Results
Description Uncertainties Differ from AssumptionsAccounting for Business Our purchase price During the last three years, Combinations
allocation methodology we have completed a number of
contains uncertainties business combinations,
In accordance with the because it requires including the acquisition of accounting standard for assumptions and
Switch Datacenters' AMS1 data
business combinations, management's judgment to center business in Amsterdam,
we allocate the estimate the fair value of Netherlands in April 2019, the
purchase price of an assets acquired and Metronode Acquisition and the
acquired business to liabilities assumed at the Infomart Dallas Acquisition in
its identifiable assets acquisition date. Key April 2018, the Itconic
and liabilities based judgments used to estimate Acquisition and the Zenium
on estimated fair the fair value of data center acquisition in
values. The excess of intangible assets include October 2017, the Verizon Data
the purchase price over projected revenue growth Center Acquisition in May
the fair value of the and operating margins, 2017, and the IO Acquisition
assets acquired and discount rates, customer in February 2017. The purchase
liabilities assumed, if attrition rates, as well price allocation for these
any, is recorded as as the estimated useful acquisitions has been
goodwill. life of intangible assets. finalized.
Management estimates the
We use all available fair value of assets and As of December 31, 2019 and
information to estimate liabilities based upon 2018, we had net intangible
fair values. We quoted market prices, the assets of $2.1 billion and
typically engage carrying value of the $2.3 billion , respectively. We
outside appraisal firms acquired assets and widely recorded amortization expense
to assist in accepted valuation for intangible assets of
determining the fair techniques, including $196.3 million , $203.4 million
value of identifiable discounted cash flows and and $177.0 million for the
intangible assets such market multiple analyses. years ended December 31, 2019 ,
as customer contracts, Our estimates are 2018 and 2017, respectively.
leases and any other inherently uncertain and
significant assets or subject to refinement. We do not believe there is a
liabilities and Unanticipated events or reasonable likelihood that
contingent circumstances may occur there will be a material
consideration, as well which could affect the change in the estimates or
as the estimated useful accuracy of our fair value assumptions we used to
life of intangible estimates, including complete the purchase price
assets. We adjust the assumptions regarding allocations and the fair value
preliminary purchase industry economic factors of assets acquired and
price allocation, as and business strategies. liabilities assumed. However,
necessary, up to one if actual results are not
year after the consistent with our estimates
acquisition closing or assumptions, we may be
date if we obtain more exposed to losses or gains
information regarding that could be material, which
asset valuations and would be recorded in our
liabilities assumed. consolidated statements of
operations in 2019 or beyond.
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Judgments and Effect if Actual Results
Description Uncertainties Differ from Assumptions
Accounting for To perform annual goodwill As of December 31, 2019,
Impairment of Goodwill impairment assessment, we goodwill attributable to the
and Other Intangible elected to assess Americas, the EMEA and the
Assets qualitative factors to Asia-Pacific reporting units
determine whether it is was $1.7 billion , $2.4 billion
In accordance with the more likely than not that and $0.6 billion ,
accounting standard for the fair value of a respectively.
goodwill and other reporting unit is less
intangible assets, we than its carrying value. Future events, changing market
perform goodwill and This analysis requires conditions and any changes in
other intangible assets assumptions and estimates key assumptions may result in
impairment reviews before performing the an impairment charge. While we
annually, or whenever quantitative goodwill have not recorded an
events or changes in impairment test, where the impairment charge against our
circumstances indicate assessment requires goodwill to date, the
that the carrying value assumptions and estimates development of adverse
of an asset may not be derived from a review of business conditions in our
recoverable. our actual and forecasted Americas, EMEA or
operating results, reporting units, such as
We complete the annual approved business plans, higher than anticipated
goodwill impairment future economic conditions customer churn
assessment for the and other market data. or significantly increased
Americas, EMEA and There were no specific operating costs, or
Asia-Pacific reporting factors present in 2019 or significant deterioration of
units to determine if 2018 that indicated a our market comparables that we
the fair values of the potential goodwill use in the market approach,
reporting units impairment. could result in an impairment
exceeded their carrying charge in future
periods.
values. We performed our annual
review of other intangible The balance of our other
We perform a review of assets by assessing if intangible assets, net, for
other intangible assets there were events or the year ended December 31,
for impairment by changes in circumstances 2019 and 2018 was $2.1 billion
assessing events or indicating that the and $2.3 billion ,
changes in carrying amount of an respectively. While we have
circumstances that asset may not be not recorded an impairment
indicate the carrying recoverable, such as a charge against our other
amount of an asset may significant decrease in intangible assets to date,
not be recoverable. market price of an asset, future events or changes in
a significant adverse circumstances, such as a
change in the extent or significant decrease in market
manner in which an asset price of an asset, a
is being used, a significant adverse change in
significant adverse change the extent or manner in which
in legal factors or an asset is being used, a
business climate that significant adverse change in
could affect the value of legal factors or business
an asset or a continuous climate, may result in an
deterioration of our impairment charge in future
financial condition. This periods.
assessment requires
assumptions and estimates Any potential impairment
derived from a review of charge against our goodwill
our actual and forecasted and other intangible assets
operating results, would not exceed the amounts
approved business plans, recorded on our consolidated
future economic conditions balance sheets.
and other market data.
There were no specific
events in 2019 or 2018
that indicated a potential
impairment.
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Judgments and Effect if Actual Results
Description Uncertainties Differ from Assumptions
Accounting for Judgments are required in As of December 31, 2019 and
Property, Plant and arriving at the estimated 2018, we had property, plant
Equipment useful life of an asset and equipment of $12.2 billion
and changes to these and $11.0 billion ,
We have a substantial estimates would have respectively. During the years
amount of property, significant impact on our ended December 31, 2019, 2018
plant and equipment financial position and and 2017, we recorded
recorded on our results of operations. depreciation expense of $1.1
consolidated balance When we lease a property billion, $1.0 billion , and
sheet. The vast for our IBX data centers, $0.9 billion , respectively.
majority of our we generally enter into While we evaluated the
property, plant and long-term arrangements appropriateness, we did not
equipment represent the with initial lease terms revise the estimated useful
costs incurred to build of at least 8-10 years and lives of our property, plant
out or acquire our IBX with renewal options and equipment during the years
data centers. Our IBX generally available to us. ended December 31, 2019, 2018
data centers are In the next several years, and 2017. Further changes in
long-lived assets. We a number of leases for our our estimated useful lives of
depreciate our IBX data centers will come our property, plant and
property, plant and up for renewal. As we equipment could have a
equipment using the start approaching the end significant impact on our
straight-line method of these initial lease results of operations.
over the estimated terms, we will need to
useful lives of the reassess the estimated
respective assets useful lives of our
(subject to the term of property, plant and
the lease in the case equipment. In addition, we
of leased assets or may find that our
leasehold improvements estimates for the useful
and integral equipment lives of non-leased assets
located in leased may also need to be
properties). revised periodically. We
periodically review the
Accounting for estimated useful lives of
property, plant and certain of our property,
equipment includes plant and equipment and
determining the changes in these estimates
appropriate period in in the future are
which to depreciate possible.
such assets, assessing
such assets for The assessment of
potential impairment, long-lived assets for
capitalizing interest impairment requires
during periods of assumptions and estimates
construction and of undiscounted and
assessing the asset discounted future cash
retirement obligations flows. These assumptions
required for certain and estimates require
leased properties that significant judgment and
require us to return are inherently uncertain.
the leased properties
back to their original
condition at the time
we decide to exit a
leased property.
Accounting for Leases Determination of As of December 31, 2019, we
accounting treatment, recorded operating lease
A significant portion including the result of right-of-use assets of $1.5
of our data center the lease classification billion, finance lease assets
spaces, office spaces test for each new lease or of $1.3 billion , operating
and equipment are lease amendment, is lease liabilities of $1.5
leased. Each time we dependent on a variety of billion, and finance lease
enter into a new lease judgments, such as liabilities of $1.5 billion .
or lease amendments, we identification of lease
analyze each lease or and non-lease components, Additionally, during the years
lease amendment for the allocation of total ended December 31, 2019, 2018
proper accounting, consideration between and 2017, we recorded rent
including determining lease and non-lease expense of approximately
if an arrangement is or components, determination $219.0 million , $185.4 million
contains a lease at of lease term, including and $157.9 million
inception and making assessing the likelihood respectively.
assessment of the of lease renewals,
leased properties to valuation of leased
determine if they are property, and establishing
operating or finance the incremental borrowing
leases. rate to calculate the
present value of the
minimum lease payment for
the lease test. The
judgments used in the
accounting for leases are
inherently subjective;
different assumptions or
estimates could result in
different accounting
treatment for a lease.
Recent Accounting Pronouncements See "Recent Accounting Pronouncements" in Note 1 within the Consolidated Financial Statements.
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