| EQUINIX INC ITEM 1A RISK FACTORS In addition to the other information in this report, the following risk factors should be considered carefully in evaluating our business and us: Risks Related to Our Business We have incurred substantial losses in the past and may continue to incur additional losses in the future |
| Although we have generated cash from operations since the quarter ended September 30, 2003, for the years ended December 31, 2005, 2004 and 2003, we incurred net losses of dlra42dtta6 million, dlra68dtta6 million and dlra84dtta2 11 ______________________________________________________________________ [33]Table of Contents million, respectively |
| In light of new rules regarding the expensing of stock-based compensation, we do not expect to become net income positive for the foreseeable future |
| In addition, if we acquire or build-out additional IBX centers, we will have additional depreciation and amortization expenses that will negatively impact our ability to achieve and sustain profitability |
| Although our goal is to achieve profitability, even without giving effect to the expensing of stock-based compensation, there can be no guarantee that we will become profitable, and we may continue to incur additional losses |
| Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability on a quarterly or annual basis |
| We have experienced fluctuations in our results of operations on a quarterly and annual basis |
| The fluctuations in our operating results may cause the market price of our common stock to decline |
| We expect to experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including: • financing or other expenses related to the acquisition, purchase or construction of additional IBX centers; • mandatory expensing of employee stock-based compensation, including restricted shares; • demand for space, power and services at our IBX centers; • changes in general economic conditions and specific market conditions in the telecommunications and Internet industries; • costs associated with the write-off or exit of unimproved or underutilized property; • the provision of customer discounts and credits; • the mix of current and proposed products and services and the gross margins associated with our products and services; • the timing required for new and future centers to open or become fully utilized; • competition in the markets in which we operate; • conditions related to international operations; • increasing repair and maintenance expenses in connection with aging IBX centers; • not enough available capacity in our existing IBX centers to book new revenue or delays in opening up new or acquired IBX centers may delay our ability to book new revenue in markets which have otherwise reached capacity; • the timing and magnitude of other operating expenses, including taxes, capital expenditures and expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets; and • the cost and availability of adequate public utilities, including power |
| Any of the foregoing factors, or other factors discussed elsewhere in this report could have a material adverse effect on our business, results of operations and financial condition |
| Although we have experienced growth in revenues in recent quarters, this growth rate is not necessarily indicative of future operating results |
| It is possible that we may never generate net income on a quarterly or annual basis |
| In addition, a relatively large portion of our expenses are fixed in the short-term, particularly with respect to lease and personnel expenses, depreciation and amortization, and interest expenses |
| Therefore, our results of operations are particularly sensitive to fluctuations in revenues |
| As such, comparisons to prior reporting periods should not be relied upon as 12 ______________________________________________________________________ [34]Table of Contents indications of our future performance |
| In addition, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors |
| If this occurs, we could experience an immediate and significant decline in the trading price of our stock |
| If the market price of our stock continues to be highly volatile, the value of an investment in our common stock may decline |
| Since January 1, 2005, our common stock has traded between dlra31dtta39 and dlra56dtta40 per share |
| The market price of the shares of our common stock has been and may continue to be highly volatile |
| Actual sales, or the market’s perception with respect to possible sales, of a substantial number of shares of our common stock within a narrow period of time could cause our stock price to fall |
| Announcements by us or others may also have a significant impact on the market price of our common stock |
| These announcements may include: • our operating results; • new issuances of equity, debt or convertible debt; • developments in our relationships with corporate customers; • announcements by our customers or competitors; • changes in regulatory policy or interpretation; • changes in the ratings of our stock by securities analysts; • purchase or development of real estate and/or additional IBX centers; • announcements with respect to the operational performance of our IBX centers; • market conditions for telecommunications stocks in general; and • general economic and market conditions |
| The stock market has from time to time experienced extreme price and volume fluctuations, which have particularly affected the market prices for emerging telecommunications companies, and which have often been unrelated to their operating performance |
| These broad market fluctuations may adversely affect the market price of our common stock |
| Our inability to use our tax net operating losses will cause us to pay taxes at an earlier date and in greater amounts which may harm our operating results |
| We believe that our ability to use our pre-2003 tax net operating losses, or NOLs, in any taxable year is subject to limitation under Section 382 of the United States Internal Revenue Code of 1986, as amended, (the ”Code”) as a result of the significant change in the ownership of our stock that resulted from our combination with i-STT Pte |
| and Pihana Pacific, Inc |
| in 2002, which we call the combination |
| We expect that a significant portion of our NOLs accrued prior to December 31, 2002 will expire unused as a result of this limitation |
| In addition to the limitations on NOL carryforward utilization described above, we believe that Section 382 of the Code will also significantly limit our ability to use the depreciation and amortization on our assets, as well as certain losses on the sale of our assets, to the extent that such depreciation, amortization and losses reflect unrealized depreciation that was inherent in such assets as of the date of the combination |
| These limitations will cause us to pay taxes at an earlier date and in greater amounts than would occur absent such limitations |
| We are exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002 |
| Although we received an unqualified opinion regarding the effectiveness of our internal controls over financial reporting as of December 31, 2004 and December 31, 2005, in the course of our ongoing evaluation of 13 ______________________________________________________________________ [35]Table of Contents our internal controls over financing reporting, we have identified certain areas which we would like to improve and are in the process of evaluating and designing enhanced processes and controls to address these areas identified during our evaluation, none of which we believe constitutes or will constitute a material change |
| However, we cannot be certain that our efforts will be effective or sufficient for us, or our independent registered public accounting firm, to issue unqualified reports in the future, especially as our business continues to grow and evolve |
| It may be difficult to design and implement effective financial controls for combined operations, and differences in existing controls of any acquired businesses may result in weaknesses that require remediation when the financial controls and reporting are combined |
| Our ability to manage our operations and growth will require us to improve our operational, financial and management controls, as well as our internal reporting systems and controls |
| We may not be able to implement improvements to our internal reporting systems and controls in an efficient and timely manner and may discover deficiencies in existing systems and controls |
| If we cannot effectively manage international operations, our revenues may not increase and our business and results of operations would be harmed |
| For the years ended December 31, 2005, 2004 and 2003, we recognized 13prca, 13prca and 15prca, respectively, of our revenues outside North America |
| We anticipate that, for the foreseeable future, a significant part of our revenues will be derived from sources outside North America |
| To date, the neutrality of our IBX centers and the variety of networks available to our customers has often been a competitive advantage for us |
| In certain of our acquired IBX centers, in Singapore in particular, the limited number of carriers available reduces that advantage |
| As a result, we may need to adapt our key revenue-generating services and pricing to be competitive in that market |
| We may experience gains and losses resulting from fluctuations in foreign currency exchange rates |
| To date, the majority of our revenues and costs have been denominated in US dollars; however, the majority of revenues and costs in our international operations have been denominated in Singapore dollars, Japanese yen and Australia and Hong Kong dollars |
| Although we have in the past and may decide to undertake foreign exchange hedging transactions in the future to reduce foreign currency transaction exposure, we do not currently intend to eliminate all foreign currency transaction exposure |
| Where our prices are denominated in US dollars, our sales could be adversely affected by declines in foreign currencies relative to the US dollar, thereby making our products more expensive in local currencies |
| Our international operations are generally subject to a number of additional risks, including: • costs of customizing IBX centers for foreign countries; • protectionist laws and business practices favoring local competition; • greater difficulty or delay in accounts receivable collection; • difficulties in staffing and managing foreign operations; • political and economic instability; • ability to obtain, transfer, or maintain licenses required by governmental entities with respect to the combined business; and • compliance with evolving governmental regulation with which we have little experience |
| We are continuing to invest in our expansion efforts but may not have sufficient customer demand in the future to realize expected returns on these investments |
| We are considering the acquisition or lease of additional properties, including construction of new IBX centers |
| We will be required to commit substantial operational and financial resources to these IBX centers, 14 ______________________________________________________________________ [36]Table of Contents generally 12-18 months in advance of securing customer contracts, and we may not have sufficient customer demand in those markets to support these centers once they are built |
| In addition, unanticipated technological changes could affect customer requirements for data centers and we may not have built such requirements into our new IBX centers |
| Any of these contingencies, if they were to occur, could make it difficult for us to realize expected or reasonable returns on these investments |
| We may begin construction of new IBX centers which could involve significant risks to our business |
| We believe that most of the pre-existing built-out data centers have already been acquired, and that there are few if any viable distressed assets available for us to acquire in our key markets today |
| In order to sustain our growth in these markets, we may begin to acquire suitable land with or without structures and build our new IBX centers from the ground up (a “greenfield” build) |
| A greenfield build involves substantial planning and lead-time, much longer time to completion than we have currently seen in our recent IBX retrofits of existing data centers, and significantly higher costs of construction, equipment, and materials which could have a negative impact on our returns |
| Site selection is also a critical factor in our expansion plans, and there may not be suitable properties available in our markets with the necessary combination of high power capacity and fiber connectivity |
| While we may prefer to locate new IBX centers adjacent to our existing locations, we may be limited by the inventory and location of suitable properties as well as the need for adequate power and fiber to the site |
| In the event we decide to build new IBX centers separate from our existing IBX centers, we may not be able to offer the number of networks that we currently provide in an existing IBX center |
| Fewer networks available in a new IBX center could result in lower interconnection revenue, lower margins, and could have a negative impact on customer retention over time |
| We may make acquisitions, which pose integration and other risks that could harm our business |
| We have recently acquired several new IBX centers, and we may seek to acquire additional IBX centers, real estate for development of new IBX centers, complementary businesses, products, services or technologies |
| As a result of these acquisitions, we may be required to incur additional debt and expenditures and issue additional shares of our common stock to pay for the acquired businesses, products, services or technologies, which will dilute our stockholders’ ownership interest and may delay, or prevent, our profitability |
| These acquisitions may also expose us to risks such as: • the possibility that we may not be able to successfully integrate acquired businesses or achieve the level of quality in such businesses to which our customers are accustomed; • the possibility that additional capital expenditures may be required; • the possibility that senior management may be required to spend considerable time negotiating agreements and integrating acquired businesses; • the possible loss or reduction in value of acquired businesses; • the possibility that our customers may not accept either the existing equipment infrastructure or the “look-and-feel” of a new or different IBX center; • the possibility that carriers may find it cost-prohibitive or impractical to bring fiber and networks into a new IBX center; • the possibility of pre-existing undisclosed liabilities regarding the property or IBX center, including but not limited to environmental or asbestos liability, of which our insurance may be insufficient or for which we may be unable to secure insurance coverage; and • the possibility that the concentration of our IBX centers in the Silicon Valley may increase our exposure to seismic activity and that these centers may be located on or near the fault zones for which we may not have adequate levels of earthquake insurance |
| 15 ______________________________________________________________________ [37]Table of Contents We cannot assure you that the price for any future acquisitions will be similar to prior IBX acquisitions |
| In fact, we expect acquisition costs, including capital expenditures required to build or render new IBX centers operational, to increase in the future |
| If our revenue does not keep pace with these potential acquisition and expansion costs, we may not be able to maintain our current or expected margins as we absorb these additional expenses |
| There is no assurance we would successfully overcome these risks or any other problems encountered with these acquisitions |
| The increased use of high power density equipment may limit our ability to fully utilize our IBX centers |
| Customers are increasing their use of high-density electrical power equipment, such as blade servers, in our IBX centers which has significantly increased the demand for power on a per cabinet basis |
| Because most of our centers were built several years ago, the current demand for electrical power may exceed the designed electrical capacity in these centers |
| As electrical power, not space, is typically the limiting factor in our IBX data centers, our ability to fully utilize our IBX centers may be limited in these centers |
| The availability of sufficient power may also pose a risk to the successful operation of our new IBX centers |
| The ability to increase the power capacity of an IBX, should we decide to, is dependent on several factors including, but not limited to, the local utility’s ability to provide additional power; the length of time required to provide such power; and/or whether it is feasible to upgrade the electrical infrastructure of an IBX to deliver additional power to customers |
| Although we are currently designing and building a much higher power specification, there is a risk that demand will continue to increase and our IBX centers could become obsolete sooner than expected |
| Our business could be harmed by prolonged electrical power outages or shortages, increased costs of energy or general availability of electrical resources |
| Our IBX centers are susceptible to regional costs of power, electrical power shortages, planned or unplanned power outages such as those that occurred in California during 2001 and in the Northeast in 2003 or natural disasters such as the tornados in the US East Coast in 2004, and limitations, especially internationally, on availability of adequate power resources |
| Power outages could harm our customers and our business |
| We attempt to limit exposure to system downtime by using backup generators and power supplies, however, we may not be able to limit our exposure entirely even with these protections in place, as was the case with power outages we experienced in our Chicago and Washington, DC metro area IBX centers in 2005 |
| In addition, the overall power shortage in California has increased the cost of energy, and although contractual price increase clauses may exist, we may not be able to pass these increased costs on to our customers |
| In each of our markets, we rely on third parties to provide a sufficient amount of power for current and future customers |
| At the same time, power and cooling requirements are growing on a per unit basis |
| We generally do not control the amount of electric power our customers draw from their installed circuits |
| This means that we could face power limitations in our centers |
| This could have a negative impact on the effective available capacity of a given center and limit our ability to grow our business, which could have a negative impact on our financial performance, operating results and cash flows |
| Increases in property taxes could adversely affect our business, financial condition and results of operations |
| Our IBX centers are subject to state and local real property taxes |
| The state and local real property taxes on our IBX centers may increase as property tax rates change and as the value of the properties are assessed or reassessed by taxing authorities |
| Many state and local governments are facing budget deficits, which may cause them to increase assessments or taxes |
| If property taxes increase, our business, financial condition and operating results could be adversely affected |
| 16 ______________________________________________________________________ [38]Table of Contents STT Communications has voting control over a substantial portion of our stock and has influence over matters requiring stockholder consent |
| As of December 31, 2005, STT Communications, through its subsidiary, i-STT Investments (Bermuda) Ltd, had voting control over approximately 16prca of our outstanding common stock |
| In addition, STT Communications is not prohibited from buying shares of our stock in public or private transactions |
| As a result, STT Communications is able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could prevent or delay a third party from acquiring or merging with us |
| We may be forced to take steps, and may be prevented from pursuing certain business opportunities, to ensure compliance with certain tax-related covenants agreed to by us in the combination agreement |
| We agreed to a covenant in the combination agreement (which we refer to as the FIRPTA covenant) that we would use all commercially reasonable efforts to ensure that at all times from and after the closing of the combination, none of our capital stock issued to STT Communications would constitute “United States real property interests” within the meaning of Section 897(c) of the Code |
| Under Section 897(c) of the Code, our capital stock issued to STT Communications would generally constitute “United States real property interests” at such point in time that the fair market value of the “United States real property interests” owned by us equals or exceeds 50prca of the sum of the aggregate fair market values of (a) our “United States real property interests,” (b) our interests in real property located outside the US, and (c) any other assets held by us which are used or held for use in our trade or business |
| Currently, the fair market value of our “United States real property interests” is significantly below the 50prca threshold |
| However, in order to assure compliance with the FIRPTA covenant, we may be limited with respect to the business opportunities we may pursue, particularly if the business opportunities would increase the amounts of “United States real property interests” owned by us or decrease the amount of other assets owned by us |
| In addition, we may take proactive steps to avoid our capital stock being deemed “United States real property interest,” including, but not limited to, (a) a sale-leaseback transaction with respect to some or all of our real property interests, or (b) the formation of a holding company organized under the laws of the Republic of Singapore which would issue shares of its capital stock in exchange for all of our outstanding stock (this reorganization would require the submission of that transaction to our stockholders for their approval and the consummation of that exchange) |
| We will take these actions only if such actions are commercially reasonable for us and our stockholders |
| We have entered into an agreement with STT Communications and its affiliate pursuant to which we will no longer be bound by the FIRPTA covenant as of September 30, 2009 |
| If we were to breach this covenant, we may be liable for damages to STT Communications |
| If regulated materials are discovered at centers leased or owned by us, we may be required to remove or clean-up such materials, the cost of which could be substantial |
| We are subject to various environmental and health and safety laws and regulations, including those relating to the generation, storage, handling and disposal of hazardous substances and wastes |
| Certain of these laws and regulations also impose joint and several liability, without regard to fault, for investigation and cleanup costs on current and former owners and operators of real property and persons who have disposed of or released hazardous substances into the environment |
| Our operations involve the use of hazardous substances and materials such as petroleum fuel for emergency generators, as well as batteries, cleaning solutions and other materials |
| In addition, we lease, own or operate real property at which hazardous substances and regulated materials have been used in the past |
| At some of these locations, hazardous substances or regulated materials are known to be present in soil or groundwater and there may be additional unknown hazardous substances or regulated materials present at sites we own, operate or lease |
| To the extent any hazardous substances or any other substance or material must be cleaned up or removed from such property, we may be responsible under applicable laws, regulations or leases for the removal or cleanup of such substances or materials, the cost of which could be substantial |
| In addition, noncompliance with existing, or adoption of more stringent, environmental or health and safety laws and regulations or the discovery of previously unknown contamination could require us to incur costs or become the basis of new or increased liabilities that could be material |
| We continue to have contractual and other business relationships and may engage in material transactions with affiliates of STT Communications |
| Circumstances may arise in which the interests of STT Communications’ affiliates may conflict with the interests of our other stockholders |
| In addition, entities affiliated with STT Communications make investments in various companies |
| They have invested in the past, and may invest in the future, in entities that compete with us |
| In the context of negotiating commercial arrangements with affiliates, conflicts of interest have arisen in the past and may arise, in this or other contexts, in the future |
| We cannot assure you that any conflicts of interest will be resolved in our favor |
| We depend on a number of third parties to provide Internet connectivity to our IBX centers; if connectivity is interrupted or terminated, our operating results and cash flow could be materially adversely affected |
| The presence of diverse telecommunications carriers’ fiber networks in our IBX centers is critical to our ability to retain and attract new customers |
| We are not a telecommunications carrier, and as such we rely on third parties to provide our customers with carrier services |
| We believe that the availability of carrier capacity will directly affect our ability to achieve our projected results |
| We rely primarily on revenue opportunities from the telecommunications carriers’ customers to encourage them to invest the capital and operating resources required to connect from their centers to our IBX centers |
| Carriers will likely evaluate the revenue opportunity of an IBX center based on the assumption that the environment will be highly competitive |
| We cannot assure you that any carrier will elect to offer its services within our IBX centers or that once a carrier has decided to provide Internet connectivity to our IBX centers that it will continue to do so for any period of time |
| Further, many carriers are experiencing business difficulties or announcing consolidations |
| As a result, some carriers may be forced to downsize or terminate connectivity within our IBX centers which could have an adverse effect on our operating results |
| Our new IBX centers require construction and operation of a sophisticated redundant fiber network |
| The construction required to connect multiple carrier facilities to our IBX centers is complex and involves factors outside of our control, including regulatory processes and the availability of construction resources |
| If the establishment of highly diverse Internet connectivity to our IBX centers does not occur, is materially delayed or is discontinued, or is subject to failure, our operating results and cash flow will be adversely affected |
| Any hardware or fiber failures on this network may result in significant loss of connectivity to our new IBX expansion centers |
| This could affect our ability to attract new customers to these IBX centers or retain existing customers |
| Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our revenue and harm our business reputation and financial results |
| We must protect our customers’ IBX infrastructure and their equipment located in our IBX centers |
| We continue to acquire IBX centers not built by us |
| If these IBX centers and their infrastructure assets are not in the condition we believe them to be in, we may be required to incur substantial additional costs to repair or upgrade the centers |
| The services we provide in each of our IBX centers are subject to failure resulting from numerous factors, including: • human error; • physical or electronic security breaches; • fire, earthquake, flood and other natural disasters; • water damage; • fiber cuts; • power loss; 18 ______________________________________________________________________ [40]Table of Contents • sabotage and vandalism; and • failure of business partners who provide our resale products |
| Problems at one or more of our IBX centers, whether or not within our control, could result in service interruptions or significant equipment damage |
| We have service level commitment obligations to certain of our customers, including our significant customers |
| As a result, service interruptions or significant equipment damage in our IBX centers could result in difficulty maintaining service level commitments to these customers |
| For example, for the year ended December 31, 2005, we recorded dlra457cmam000 in service level credits to various customers, primarily associated with two separate power outages that affected our Chicago and Washington, DC metro area IBX centers |
| If we incur significant financial commitments to our customers in connection with a loss of power, or our failure to meet other service level commitment obligations, our liability insurance and revenue reserves may not be adequate |
| In addition, any loss of services, equipment damage or inability to meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results |
| Furthermore, we are dependent upon Internet service providers, telecommunications carriers and other website operators in the US, Asia and elsewhere, some of which have experienced significant system failures and electrical outages in the past |
| Users of our services may in the future experience difficulties due to system failures unrelated to our systems and services |
| If for any reason, these providers fail to provide the required services, our business, financial condition and results of operations could be materially adversely impacted |
| A portion of the managed services business we acquired in the combination involves the processing and storage of confidential customer information |
| Inappropriate use of those services could jeopardize the security of customers’ confidential information causing losses of data or financially impacting us or our customers and subjecting us to the risk of lawsuits |
| Efforts to alleviate problems caused by computer viruses or other inappropriate uses or security breaches may lead to interruptions, delays or cessation of our managed services |
| There is no known prevention or defense against denial of service attacks |
| During a prolonged denial of service attack, Internet service may not be available for several hours, thus negatively impacting hosted customers’ on-line business transactions |
| Affected customers might file claims against us under such circumstances |
| Our property and liability insurance may not be adequate to cover these customer claims |
| We resell products and services of third parties that may require us to pay for such products and services even if our customers fail to pay us for the products and services, which may have a negative impact on our operating results |
| In order to provide resale services such as bandwidth, managed services and other network management services, we contract with third party service providers |
| These services require us to enter into fixed term contracts for services with third party suppliers of products and services |
| If we experience the loss of a customer who has purchased a resale product, we will remain obligated to continue to pay our suppliers for the term of the underlying contracts |
| The payment of these obligations without a corresponding payment from customers will reduce our financial resources and may have a material adverse affect on our financial performance and operating results |
| IBM accounts for a significant portion of our revenues, and the loss of IBM as a customer could significantly harm our business, financial condition and results of operations |
| For the years ended December 31, 2005, 2004 and 2003, IBM accounted for 11prca, 13prca and 15prca, respectively, of our revenues |
| We expect that IBM will continue to account for a significant portion of our revenue for the foreseeable future |
| Although the term of our IBM contract runs through 2011, IBM currently has 19 ______________________________________________________________________ [41]Table of Contents the right to reduce its commitment to us pursuant to the terms and requirements of its customer agreement |
| If we lose IBM as a customer or if it significantly reduces the level of its commitment, our business, financial condition and results of operations could be adversely affected |
| We may not be able to compete successfully against current and future competitors |
| Our IBX centers and other products and services must be able to differentiate themselves from those of other providers of space and services for telecommunications companies, web hosting companies and other colocation providers |
| In addition to competing with neutral colocation providers, we must compete with traditional colocation providers, including local phone companies, long distance phone companies, Internet service providers and web hosting facilities |
| Similarly, with respect to our other products and services, including managed services, bandwidth services and security services, we must compete with more established providers of similar services |
| Most of these companies have longer operating histories and significantly greater financial, technical, marketing and other resources than us |
| Because of their greater financial resources, some of our competitors have the ability to adopt aggressive pricing policies, especially if they have been able to restructure their debt or other obligations |
| As a result, in the future, we may suffer from pricing pressure that would adversely affect our ability to generate revenues and adversely affect our operating results |
| In addition, these competitors could offer colocation on neutral terms, and may start doing so in the same metropolitan areas in which we have IBX centers |
| Some of these competitors may also provide our target customers with additional benefits, including bundled communication services, and may do so in a manner that is more attractive to our potential customers than obtaining space in our IBX centers |
| If these competitors were able to adopt aggressive pricing policies together with offering colocation space, our ability to generate revenues would be materially adversely affected |
| We may also face competition from persons seeking to replicate our IBX concept by building new centers or converting existing centers that some of our competitors are in the process of divesting |
| We may continue to see increased competition for data center space and customers from large real estate investment trusts (“REITS”) who also operate in our market |
| We may experience competition from our landlords, some of which are REITS, in this regard |
| Rather than leasing available space in our buildings to large single tenants, they may decide to convert the space instead to smaller square foot units designed for multi-tenant colocation use |
| Landlords/REITS may enjoy a cost effective advantage in providing services similar to those provided by our IBXs, and in addition to the risk of losing customers to these parties this could also reduce the amount of space available to us for expansion in the future |
| Competitors may operate more successfully or form alliances to acquire significant market share |
| Furthermore, enterprises that have already invested substantial resources in outsourcing arrangements may be reluctant or slow to replace, limit or compete with their existing systems by becoming a customer |
| Customers may also decide it is cost effective for them to build-out their own data centers which could have a negative impact on our results of operations |
| In addition, other companies may be able to attract the same potential customers that we are targeting |
| Once customers are located in competitors’ facilities, it may be extremely difficult to convince them to relocate to our IBX centers |
| Because we depend on the retention of key employees, failure to maintain stock option incentives may be disruptive to our business |
| Our success in retaining key employees and discouraging them from moving to a competitor is an important factor in our ability to remain competitive |
| As is common in our industry, our employees are typically compensated through grants of stock options in addition to their regular salaries |
| In addition to granting stock options to new hires, we periodically grant new stock options to certain employees as an incentive to remain with the company |
| To the extent we are unable to adequately maintain these stock option incentives due to stock option expensing or otherwise, and should employees decide to leave the company, this may be disruptive to our business and may adversely affect our business, financial condition and results of operations |
| 20 ______________________________________________________________________ [42]Table of Contents Because we depend on the development and growth of a balanced customer base, failure to attract and retain this base of customers could harm our business and operating results |
| Our ability to maximize revenues depends on our ability to develop and grow a balanced customer base, consisting of a variety of companies, including network service providers, site and performance management companies, and enterprise and content companies |
| The more balanced the customer base within each IBX center, the better we will be able to generate significant interconnection revenues, which in turn increases our overall revenues |
| Our ability to attract customers to our IBX centers will depend on a variety of factors, including the presence of multiple carriers, the mix of products and services offered by us, the overall mix of customers, the IBX center’s operating reliability and security and our ability to effectively market our services |
| In addition, some of our customers are, and are likely to continue to be, Internet companies that face many competitive pressures and that may not ultimately be successful |
| This may be disruptive to our business and may adversely affect our business, financial condition and results of operations |
| Our products and services have a long sales cycle that may materially adversely affect our business, financial condition and results of operations |
| A customer’s decision to license cabinet space in one of our IBX centers and to purchase additional services typically involves a significant commitment of resources |
| In addition, some customers will be reluctant to commit to locating in our IBX centers until they are confident that the IBX center has adequate carrier connections |
| Furthermore, we may expend significant time and resources in pursuing a particular sale or customer that does not result in revenue |
| Delays due to the length of our sales cycle may materially adversely affect our business, financial condition and results of operations |
| We are subject to securities class action litigation, which may harm our business and results of operations |
| In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities |
| During the quarter ended September 30, 2001, putative shareholder class action lawsuits were filed against us, a number of our officers and directors, and several investment banks that were underwriters of our initial public offering |
| The suits allege that the underwriter defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases in the aftermarket at pre-determined prices |
| Plaintiffs allege that the prospectus for our initial public offering was false and misleading and in violation of the securities laws because it did not disclose these arrangements |
| In July 2003, a special litigation committee of our board of directors agreed to participate in a settlement with the plaintiffs |
| The settlement agreement, as amended, is subject to court approval and sufficient participation by defendants in similar actions |
| If the proposed settlement, as amended, is not approved by the court or a sufficient number of defendants do not participate in the settlement, the defense of this litigation may continue and therefore increase our expenses and divert management’s attention and resources |
| An adverse outcome in this litigation could seriously harm our business and results of operations |
| In addition, we may, in the future, be subject to other securities class action or similar litigation |
| Risks Related to Our Industry If the use of the Internet and electronic business does not grow, our revenues may not grow |
| Acceptance and use of the Internet may not continue to develop at historical rates and a sufficiently broad base of consumers may not adopt or continue to use the Internet and other online services as a medium of commerce |
| Demand for Internet services and products are subject to a high level of uncertainty and are subject to significant pricing pressure, especially in Asia-Pacific |
| As a result, we cannot be certain that a viable market for our IBX centers will materialize |
| If the market for our IBX centers grows more slowly than we currently anticipate, our revenues may not grow and our operating results could suffer |
| 21 ______________________________________________________________________ [43]Table of Contents Government regulation may adversely affect the use of the Internet and our business |
| Various laws and governmental regulations governing Internet related services, related communications services and information technologies, and electronic commerce remain largely unsettled, even in areas where there has been some legislative action |
| It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, telecommunications services, and taxation, apply to the Internet and to related services such as ours |
| We have limited experience with such international regulatory issues and substantial resources may be required to comply with regulations or bring any non-compliant business practices into compliance with such regulations |
| In addition, the development of the market for online commerce and the displacement of traditional telephony service by the Internet and related communications services may prompt an increased call for more stringent consumer protection laws or other regulation both in the US and abroad that may impose additional burdens on companies conducting business online and their service providers |
| The compliance with, adoption or modification of, laws or regulations relating to the Internet, or interpretations of existing laws, could have a material adverse effect on our business, financial condition and results of operation |
| Industry consolidation may have a negative impact on our business model |
| The telecommunications industry is currently undergoing consolidation |
| As customers combine businesses, they may require less colocation space, and there may be fewer networks available to choose from |
| Given the competitive and evolving nature of this industry, further consolidation of our customers and/or our competitors may present a risk to our network neutral business model and have a negative impact on our revenues |
| In addition, increased utilization levels industry-wide could lead to a reduced amount of attractive expansion opportunities available to us |
| Terrorist activity throughout the world and military action to counter terrorism could adversely impact our business |
| The September 11, 2001 terrorist attacks in the US, the ensuing declaration of war on terrorism and the continued threat of terrorist activity and other acts of war or hostility appear to be having an adverse effect on business, financial and general economic conditions internationally |
| These effects may, in turn, increase our costs due to the need to provide enhanced security, which would have a material adverse effect on our business and results of operations |
| These circumstances may also adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our IBX centers |
| We may not have adequate property and liability insurance to cover catastrophic events or attacks |