SDXC Switch & Data Facilities Company (MM)

Switch & Data Facilities Company, Inc. (NASDAQ: SDXC), a leading provider of network neutral data center and Internet exchange services, today reported financial results for the year ended December 31, 2009 and the fourth quarter.

Results of Operations

Fourth Quarter

Total revenues for the fourth quarter ended December 31, 2009 increased to $55.4 million from $45.8 million in the comparable period in 2008, an increase of 21%. Recurring revenues, which consist of colocation and interconnection services, were $50.6 million in the fourth quarter 2009, an increase of 18% over the same period in the prior year. Non-recurring revenues in the fourth quarter 2009, representing one time installation fees and services, were $4.8 million compared to $2.8 million in the comparable period in 2008. Billed cabinets increased from 8,110 in the third quarter 2009 to 8,588 in the fourth quarter. This was the largest sequential growth in billed cabinets in over three years.

Cost of revenues, excluding depreciation and amortization, for the fourth quarter 2009 was $28.4 million as compared to $24.4 million for the fourth quarter 2008. As a percentage of revenues, cost of revenues improved to 51% in the fourth quarter of 2009 from 53% in the same period of the prior year.

Sales and marketing costs for the fourth quarter 2009 were $5.6 million as compared to $5.0 million in the comparable quarter in 2008. General and administrative expenses were $4.8 million for the fourth quarter as compared to $4.6 million for the fourth quarter 2008.

Other expenses were $2.6 million for the fourth quarter 2009 as compared to $0.1 million in the comparable quarter 2008. These expenses were primarily from the pending acquisition of Switch and Data by Equinix, Inc.

Operating income increased 183% to $5.3 million in the fourth quarter of 2009 as compared to $1.9 million in the comparable period in 2008.

Adjusted EBITDA increased to $19.9 million in the fourth quarter of 2009 as compared to $15.8 million in the comparable period in 2008, an increase of 26%. Adjusted EBITDA margins increased to 36% in the fourth quarter, from 35% in the comparable period in 2008. See “Adjusted EBITDA Reconciliation” for further discussion.

Net loss for the for the fourth quarter of 2009 was $2.1 million, including acquisition related expenses of $2.6 million, or $0.06 per basic and diluted common share as compared to a net loss of $8.5 million or $0.25 per basic and diluted common share in the comparable period in 2008.

Full Year 2009

For the year ended December 31, 2009, total revenues increased to $205.4 million from $171.5 million for the year ended December 31, 2008, an increase of 20%. Recurring revenues were $191.3 million, an increase of 18% over 2008. For the year ended December 31, 2009, non-recurring revenues were $14.2 million, an increase of 44% over the prior year.

For the year ended December 31, 2009, cost of revenues, excluding depreciation and amortization, was $103.1 million, up from $90.1 million for the year ended December 31, 2008. As a percentage of revenues, cost of revenues was 50% in 2009 as compared to 53% in the same period of the prior year.

For the year ended December 31, 2009, sales and marketing costs were $20.7 million as compared to $19.7 million for the same period in 2008. For the year ended December 31, 2009, general and administrative expenses were $19.0 million as compared to $17.7 million for the year ended December 31, 2008.

Other expenses were $3.1 million for the year ended December 31, 2009, as compare to $0.8 million for the year ended December 31, 2008. These expenses were primarily from the pending acquisition of Switch and Data by Equinix, Inc.

For the year ended December 31, 2009, Adjusted EBITDA increased to $76.3 million from $56.5 million in 2008, an increase of 35%.

Net income for the year was $0.4 million, including acquisition related expenses of $2.6 million, or $0.01 per basic and diluted common share as compared to a net loss of $7.0 million or $0.20 per basic and diluted common share in 2008.

Balance Sheet and Cash Flows

Switch and Data had cash and cash equivalents of $28.5 million on December 31, 2009. Bank debt outstanding on December 31, 2009 was $142.5 million. Capital expenditures in the quarter were $8.1 million and $62.5 million for the full year.

Merger with Equinix

On October 21, 2009, Switch and Data and Equinix, Inc. (Nasdaq: EQIX) entered into a definitive agreement for Equinix to acquire Switch and Data in a transaction valued at approximately $689 million in cash and stock, based on Switch and Data’s October 20th market closing price. On January 29, 2010, Switch and Data stockholders voted to approve Switch and Data's merger with and into Sundance Acquisition Corporation, a wholly-owned subsidiary of Equinix. Completion of the merger remains subject to the expiration or termination of the waiting period imposed by the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the satisfaction or waiver of the other closing conditions specified in the merger agreement between Equinix and Switch and Data. The merger is expected to close in the second quarter of 2010. There can be no assurances that the proposed merger will be consummated.

The merger agreement is attached as Exhibit 2.1 to the Current Report on Form 8-K that Switch and Data filed with the Securities and Exchange Commission (the "SEC") on October 22, 2009.

Switch and Data will not host an investor call.

About Switch and Data

Switch and Data is a premier provider of network-neutral data centers that house, power, and interconnect the Internet. Leading content companies, enterprises, and communications service providers rely on Switch and Data to connect to customers and exchange Internet traffic. Switch and Data has built a reputation for world-class service, delivered across the broadest colocation footprint and richest network of interconnections in North America. Switch and Data operates 34 sites in the U.S. and Canada, provides one of the highest customer satisfaction scores for technical and engineering support in the industry, and is home to PAIX(R) - the world's first commercial Internet exchange.

Important information about Switch and Data is routinely posted to the investor relations section of the website www.switchanddata.com. For copies of all Switch and Data press releases and SEC filings, please visit the website. To automatically receive Switch and Data financial news by email, please visit the website and subscribe to Email Alerts. Investors are encouraged to check Switch and Data's website frequently to access the most up-to-date information.

Forward-Looking Statements

Certain statements herein, particularly in those sections titled "Balance Sheet and Cash Flows” and "Merger with Equinix" are “forward-looking statements.” Such forward-looking statements are not historical facts but instead reflect Switch and Data’s current expectations or beliefs concerning future events and results of operations, many of which, by their nature, are inherently uncertain and outside of Switch and Data’s control. Words such as expects, believes, estimates, anticipates and similar language indicates forward-looking statements. It is possible that actual results may differ, possibly materially, from those anticipated in these forward-looking statements. Factors that might cause such differences include, but are not limited to, the failure of a condition to closing of the transaction to be satisfied; and the risk that a regulatory approval that may be required for the transaction is not obtained or is obtained subject to conditions that are not anticipated. Further information concerning Switch and Data and its business, including factors that potentially could materially affect Switch and Data's financial results and conditions, as well as its other achievements, are contained in Switch and Data's filings with the SEC. Switch and Data does not undertake to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

Switch & Data Facilities Company, Inc.

Consolidated Statements of Operations

(in thousands, except earnings per common share)

(Unaudited)

   

For the three months endedDecember 31,

 

For the year endedDecember 31,

2008   2009 2008   2009 Revenues $ 45,774 $ 55,425 $ 171,525 $ 205,438 Costs and operating expenses Cost of revenues, exclusive of depreciation and amortization 24,377 28,446 90,122 103,133 Sales and marketing 4,993 5,603 19,670 20,733 General and administrative 4,564 4,798 17,659 18,955 Depreciation and amortization 9,954 11,236 30,716 41,473 Lease litigation settlement   -     -     -     700   Total costs and operating expenses   43,888     50,083     158,167     184,994   Operating income 1,886 5,342 13,358 20,444 Interest income 74 11 1,587 56 Interest expense (10,329 ) (4,546 ) (19,193 ) (15,775 ) Loss from debt extinguishment - - (695 ) - Other expense, net   (113 )   (2,577 )   (768 )   (3,063 ) Income (loss) from continuing operations before income taxes (8,482 ) (1,770 ) (5,711 ) 1,662 Provision for income taxes   -     (304 )   (1,324 )   (1,254 ) Net income (loss) (8,482 ) (2,074 ) (7,035 ) 408   Income (loss) per common share—basic and diluted         Net income (loss) attributable to common stockholders $ (0.25 ) $ (0.06 ) $ (0.20 ) $ 0.01     Weighted average common shares outstanding 34,563 34,604 34,369 34,569   Income (loss) per common share—basic and diluted         Net income (loss) attributable to common stockholders $ (0.25 ) $ (0.06 ) $ (0.20 ) $ 0.01     Weighted average common shares outstanding 34,563 34,604 34,369 35,330  

Switch & Data Facilities Company, Inc.

Consolidated Balance Sheets

(in thousands)

(Unaudited)

 

  December 31,   December 31, 2008 2009 Assets Current assets Cash and cash equivalents $ 14,706 $ 28,528

Accounts receivable, net of allowance for bad debts of $818 and $1,056, respectively

11,497 13,930 Prepaids and other assets   2,429     2,849   Total current assets 28,632 45,307 Property and equipment, net 270,286 297,312 Goodwill 36,023 36,023 Other intangible assets, net 18,575 15,274 Other long-term assets, net   5,349     6,464   Total assets $ 358,865   $ 400,380     Liabilities, Preferred Stock and Stockholders’ Equity Current liabilities Accounts payable and accrued expenses $ 34,131 $ 23,741 Derivative liability 7,434 8,713 Current portion of unearned revenue 3,629 3,275 Current portion of deferred rent 455 336 Current portion of customer security deposits 547 577 Current portion of long-term debt - 14,250 Current portion of capital lease obligation   -     1,934   Total current liabilities 46,196 52,826 Unearned revenue, less current portion 1,858 1,506 Deferred rent, less current portion 18,587 26,287 Customer security deposits, less current portion 376 319 Long-term debt, less current portion 120,000 128,250 Long-term portion of capital lease obligation   50,927     58,364   Total liabilities 237,944 267,552   Commitments and contingencies Stockholders’ equity

Common stock, $0.0001 par value, authorized 200,000 shares; 34,563 and 34,748 issued and outstanding as of December 31, 2008 and December 31, 2009, respectively

3 3

Preferred stock, $0.0001 par value, authorized 25,000 shares; no shares issued

- - Additional paid-in capital 347,909 356,624 Accumulated deficit (224,534 ) (224,126 ) Accumulated other comprehensive income (loss)   (2,457 )   327   Total stockholders’ equity   120,921     132,828   Total liabilities, preferred stock and stockholders’ equity $ 358,865   $ 400,380    

Switch & Data Facilities Company, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

For the year endedDecember 31,

2008   2009 Cash flows from operating activities: Net income (loss) $ (7,035 ) $ 408 Adjustments to reconcile net income (loss) to net cash provided by operating activities Depreciation 26,624 37,861 Amortization of debt issuance costs 667 921 Amortization of other intangible assets 4,092 3,617 Loss on debt extinguishment 695 - Stock compensation expense 6,314 6,292 Provision for bad debts, net of recoveries 839 1,150 Deferred rent 6,094 7,289 Change in fair value of derivative 6,884 1,279

Loss (gain) on disposal of fixed assets

5 (99 ) Changes in operating assets and liabilities, net of acquired amounts Increase in accounts receivable (3,509 ) (3,451 ) Increase in prepaids and other assets (997 ) (411 ) Increase in other long term assets (189 ) (651 )

Increase in accounts payable, accrued expenses, and other liabilities

5,003 252 Decrease (increase) in unearned revenue   127     (869 ) Net cash provided by operating activities   45,614     53,588     Cash flows from investing activities: Purchase of property and equipment (154,710 ) (62,629 ) Proceeds from sale of property and equipment   -     115   Net cash used in investing activities   (154,710 )   (62,514 )   Cash flows from financing activities: Principal payments under long-term debt (38,188 ) - Principal payments under capital lease - (953 ) Proceeds from long-term debt 120,000 22,500 Proceeds from exercise of stock options 997 2,423 Excess Tax Benefits from stock-based compensation 93 - Debt issuance and amendment costs   (4,039 )   (1,388 ) Net cash provided by financing activities   78,863     22,582     Net increase (decrease) in cash and cash equivalents (30,233 ) 13,656 Effect of exchange rate changes on cash (656 ) 166 Cash and cash equivalents: Beginning of the period   45,595     14,706   End of the period $ 14,706   $ 28,528    

Additional Information

    For the three months

ended December 31,

  For the year

ended December 31,

($ in Thousands) 2008   2009 2008   2009 Revenues         Colocation $ 29,021 64 % $ 34,557 62 % $ 108,504 63 % $ 129,815 63 % Interconnection   13,918 30 %   16,049 29 %   53,192 31 %   61,445 30 % Recurring Total $ 42,939 94 % $ 50,606 91 % $ 161,696 94 % $ 191,260 93 % Non-recurring   2,835 6 %   4,820 9 %   9,829 6 %   14,178 7 % Total $ 45,774 100 % $ 55,426 100 % $ 171,525 100 % $ 205,438 100 %     December 31,   December 31, 2008 2009 Number of cross connects 21,149 22,277 Cabinet equivalents billed 7,596 8,588 Utilization rate 58.4 % 61.3 %   For the three months ended December 31, December 31, 2008 2009

Percentage of sales to existing customers

84 % 92 %

Churn as a percentage of recurring revenues

1.5 % 1.4 %   New Sales (in thousands): Recurring revenue * $ 1,305 $ 1,640 Non-recurring revenue **   1,717     2,339   New Sales $ 3,022   $ 3,979  

*Recurring revenues represent new service agreements entered into by new and existing customers during the given quarter. Revenues from these agreements will recur monthly over the life of the agreement.

**Non-recurring revenues represent the one-time installation fees associated with new service agreements. These one-time fees are billed to customers upon completion of the installation service and such revenues are recognized on a straight-line basis over the life of the agreement.

Adjusted EBITDA Reconciliation

The following is a reconciliation of Switch and Data’s operating income (loss) to Adjusted EBITDA for the periods ended December 31, 2008 and December 31, 2009. This reconciliation can also be found on Switch and Data’s website in the Investor Relations section.

Switch and Data defines "Adjusted EBITDA" as operating income from continuing operations, plus depreciation and amortization, stock-based compensation expense and other non-cash items such as deferred rent. Switch and Data calculates Adjusted EBITDA margin as Adjusted EBITDA divided by total revenues.

Switch and Data uses Adjusted EBITDA as follows:

• As a measurement of operating performance because they assist management in comparing the results on a consistent basis as Adjusted EBITDA removes the impact of items not directly resulting from operations;
• For planning purposes, including the preparation of the internal annual operating budget;
• To establish targets for certain management compensation; and
• To evaluate its capacity to incur and service debt, fund capital expenditures and expand the business.

Adjusted EBITDA as calculated by the Switch and Data is not necessarily comparable to similarly titled measures used by other companies. In addition, Adjusted EBITDA: (a) does not represent net income or cash flows from operating activities as defined by GAAP; (b) is not necessarily indicative of cash available to fund Switch and Data’s cash flow needs; and (c) should not be considered as an alternative to net income, operating income, cash flows from operating activities or other financial information as determined under GAAP.

Switch and Data prepares Adjusted EBITDA by adjusting EBITDA to eliminate the impact of a number of items that it does not consider indicative of its core operating performance. Investors are encouraged to evaluate each adjustment and the reasons Switch and Data considers them appropriate. As an analytical tool, Adjusted EBITDA is subject to all of the limitations applicable to EBITDA. In addition, in evaluating Adjusted EBITDA, investors should be aware that in the future Switch and Data may incur expenses similar to the adjustments in this presentation. Switch and Data’s presentation of Adjusted EBITDA should not be construed as an implication that its future results will be unaffected by unusual or non-recurring items.

   

For the three months endedDecember 31,

 

For the year endedDecember 31,

(in thousands) 2008   2009 2008   2009 Operating income $ 1,886 $ 5,342 $ 13,358 $ 20,444 Depreciation and amortization 9,954 11,236 30,716 41,473 Lease litigation settlement - - - 700 Deferred rent expense, non-cash 2,385 1,563 6,094 7,289 Loss (gain) on disposal of fixed assets (1) (2 ) 90 4 1 Stock-based compensation expense (2) 1,606 1,668 6,312 6,292 Legal expenses for real estate litigation (3)   -     -   63   65 EBITDA $ 15,829   $ 19,899 $ 56,547 $ 76,264

Footnotes:

(1) Loss (gain) on disposal of fixed assets is a non-cash component of Adjusted EBITDA. These expenses may be included in both the General and administrative and Cost of revenues line items of the Statement of Operations.

(2) Stock-based compensation expense is a non-cash expense to Switch and Data that can be found on the Statement of Cash Flows.

(3) Switch and Data has incurred legal expenses for lawsuits brought by several landlords for breach of lease agreements. These expenses are included in the General and administrative line item of the Statement of Operations.