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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2008
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File Number: 0-29375
SAVVIS, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 43-1809960 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1 SAVVIS Parkway
Town & Country, Missouri 63017
(Address of principal executive offices) (Zip Code)
(314) 628-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer x | Accelerated Filer ¨ | |
Non-Accelerated Filer ¨ | Smaller Reporting Company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Common stock, $0.01 Par Value – 53,391,184 shares as of July 28, 2008
The Exhibit Index begins on page 43.
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QUARTERLY REPORT ON FORM 10-Q
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PART I. | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS. |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, 2008 | December 31, 2007 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 118,209 | $ | 183,141 | ||||
Trade accounts receivable, net of allowance of $5,227 and $5,060, respectively | 58,122 | 51,925 | ||||||
Prepaid expenses and other current assets | 28,420 | 19,548 | ||||||
Total Current Assets | 204,751 | 254,614 | ||||||
Property and equipment, net | 692,160 | 616,584 | ||||||
Other non-current assets | 19,623 | 18,775 | ||||||
Total Assets | $ | 916,534 | $ | 889,973 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current Liabilities: | ||||||||
Payables and other trade accruals | $ | 50,051 | $ | 57,673 | ||||
Current portion of long-term debt and lease obligations | 12,624 | 6,196 | ||||||
Other current accrued liabilities | 67,251 | 101,419 | ||||||
Total Current Liabilities | 129,926 | 165,288 | ||||||
Long-term debt, net of current portion | 402,382 | 351,594 | ||||||
Capital and financing method lease obligations, net of current portion | 166,146 | 162,054 | ||||||
Other accrued liabilities | 63,028 | 59,182 | ||||||
Total Liabilities | 761,482 | 738,118 | ||||||
Stockholders’ Equity: | ||||||||
Common stock; $0.01 par value, 1,500,000 shares authorized; 53,379 and 52,977 shares issued and outstanding, respectively | 534 | 530 | ||||||
Additional paid-in capital | 757,070 | 738,950 | ||||||
Accumulated deficit | (595,507 | ) | (583,901 | ) | ||||
Accumulated other comprehensive loss | (7,045 | ) | (3,724 | ) | ||||
Total Stockholders’ Equity | 155,052 | 151,855 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 916,534 | $ | 889,973 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenue | $ | 212,941 | $ | 200,554 | $ | 416,224 | $ | 405,802 | ||||||||
Operating Expenses: | ||||||||||||||||
Cost of revenue (including non-cash equity-based compensation of $1,646, $1,507, $3,101, and $2,866, respectively)(1) | 122,872 | 113,755 | 241,523 | 230,430 | ||||||||||||
Sales, general, and administrative expenses (including non-cash equity-based compensation of $7,983, $6,658, $15,469, and $13,078, respectively) (1) | 55,048 | 52,321 | 108,356 | 105,492 | ||||||||||||
Depreciation, amortization, and accretion | 34,154 | 22,787 | 65,898 | 44,432 | ||||||||||||
Gain on sales of data center and CDN assets | — | (180,846 | ) | — | (306,044 | ) | ||||||||||
Total Operating Expenses | 212,074 | 8,017 | 415,777 | 74,310 | ||||||||||||
Income from Operations | 867 | 192,537 | 447 | 331,492 | ||||||||||||
Loss on debt extinguishment | — | 45,127 | — | 45,127 | ||||||||||||
Net interest expense and other | 8,138 | 15,800 | 11,123 | 34,137 | ||||||||||||
Income (Loss) before Income Taxes | (7,271 | ) | 131,610 | (10,676 | ) | 252,228 | ||||||||||
Income tax expense (benefit) | 113 | (1,663 | ) | 930 | 4,414 | |||||||||||
Net Income (Loss) | $ | (7,384 | ) | $ | 133,273 | $ | (11,606 | ) | $ | 247,814 | ||||||
Net Income (Loss) per Common Share | ||||||||||||||||
Basic | $ | (0.14 | ) | $ | 2.53 | $ | (0.22 | ) | $ | 4.72 | ||||||
Diluted | $ | (0.14 | ) | $ | 2.36 | $ | (0.22 | ) | $ | 4.48 | ||||||
Weighted-Average Common Shares Outstanding(2) | ||||||||||||||||
Basic | 53,305 | 52,631 | 53,199 | 52,449 | ||||||||||||
Diluted | 53,305 | 57,178 | 53,199 | 55,711 | ||||||||||||
(1) | Excludes depreciation, amortization, and accretion, which is reported separately. |
(2) | For the three and six months ended June 30, 2008, the effects of including the incremental shares associated with the Convertible Notes, options, unvested restricted preferred units, unvested restricted stock units, and unvested restricted stock awards are anti-dilutive and, as such, are not included in the weighted-average common shares outstanding. For the three and six months ended June 30, 2007, diluted weighted-average common shares outstanding included 2.9 million and 1.4 million common shares, respectively, which reflected the dilution impact of the Convertible Notes using the “if-converted” method. |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) | $ | (11,606 | ) | $ | 247,814 | |||
Reconciliation of net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation, amortization, and accretion | 65,898 | 44,432 | ||||||
Non-cash equity-based compensation | 18,570 | 15,944 | ||||||
Accrued interest | 1,813 | 31,912 | ||||||
Gain on sales of data center and CDN assets | — | (306,044 | ) | |||||
Loss on debt extinguishment | — | 45,127 | ||||||
Other | 135 | (974 | ) | |||||
Net changes in operating assets and liabilities, net of effects from sales of assets: | ||||||||
Trade accounts receivable, net | (6,153 | ) | 5,268 | |||||
Prepaid expenses and other current and non-current assets | (9,956 | ) | (12,840 | ) | ||||
Payables and other trade accruals | 3,394 | 4,557 | ||||||
Other accrued liabilities | (8,680 | ) | (18,879 | ) | ||||
Net cash provided by operating activities | 53,415 | 56,317 | ||||||
Cash Flows from Investing Activities: | ||||||||
Payments for capital expenditures | (140,400 | ) | (161,863 | ) | ||||
Proceeds from sales of data center and CDN assets, net | — | 318,530 | ||||||
Other investing activities, net | — | 694 | ||||||
Net cash provided by (used in) investing activities | (140,400 | ) | 157,361 | |||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from long-term debt | 33,283 | 345,000 | ||||||
Proceeds from stock option exercises | 821 | 14,129 | ||||||
Payments for extinguishment of Series A Subordinated Notes | — | (342,491 | ) | |||||
Payments for debt issuance costs | (1,135 | ) | (8,866 | ) | ||||
Payments for employee taxes on equity-based instruments | (2,245 | ) | (10,113 | ) | ||||
Principal payments under capital lease obligations | (2,671 | ) | (1,416 | ) | ||||
Other financing activities, net | (1,829 | ) | — | |||||
Net cash provided by (used in) financing activities | 26,224 | (3,757 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (4,171 | ) | 389 | |||||
Net increase (decrease) in cash and cash equivalents | (64,932 | ) | 210,310 | |||||
Cash and cash equivalents, beginning of period | 183,141 | 98,693 | ||||||
Cash and cash equivalents, end of period | $ | 118,209 | $ | 309,003 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid for interest | $ | 15,469 | $ | 7,689 | ||||
Cash paid for income taxes | $ | 1,054 | $ | 2,354 | ||||
Non-cash Investing and Financing Activities: | ||||||||
Assets acquired and obligations incurred under capital leases | $ | — | $ | 30,513 | ||||
Assets acquired and obligations incurred under financing agreements | $ | 32,186 | $ | — | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
Number of Shares of Common Stock Outstanding | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | Total Stockholders’ Equity | ||||||||||||||||
Balance at December 31, 2007 | 52,977 | $ | 530 | $ | 738,950 | $ | (583,901 | ) | $ | (3,724 | ) | $ | 151,855 | ||||||||
Net loss | — | — | — | (11,606 | ) | — | (11,606 | ) | |||||||||||||
Foreign currency translation adjustments | — | — | — | — | (3,321 | ) | (3,321 | ) | |||||||||||||
Issuance of common stock upon exercise of stock options | 59 | 1 | 820 | — | — | 821 | |||||||||||||||
Issuance of restricted stock | 7 | — | — | — | — | — | |||||||||||||||
Issuance of common stock for Employee Stock Purchase Plan | 69 | 1 | 1,124 | — | — | 1,125 | |||||||||||||||
Issuance of common stock upon vesting of stock awards | 267 | 2 | (3 | ) | — | — | (1 | ) | |||||||||||||
Payments for employee taxes on equity-based instruments | — | — | (2,245 | ) | — | — | (2,245 | ) | |||||||||||||
Recognition of deferred compensation costs | — | — | 18,424 | — | — | 18,424 | |||||||||||||||
Balance at June 30, 2008 | 53,379 | $ | 534 | $ | 757,070 | $ | (595,507 | ) | $ | (7,045 | ) | $ | 155,052 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular dollars in thousands, except per share data)
NOTE 1—DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
SAVVIS, Inc. (the Company) provides information technology (IT) services including managed hosting, utility computing, colocation, managed security, network, and professional services through its global infrastructure to businesses and government agencies around the world.
These unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, under the rules and regulations of the U.S. Securities and Exchange Commission (the SEC), and on a basis substantially consistent with the audited consolidated financial statements of the Company as of and for the year ended December 31, 2007. Such audited financial statements are included in the Company’s Annual Report on Form 10-K (the Annual Report) filed with the SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and footnotes included in its Annual Report.
These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation and, in the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. In addition, certain amounts from prior years have been reclassified to conform to the current year presentation.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts, and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents. As of June 30, 2008, substantially all of the Company’s $118.2 million of cash and cash equivalents was held in money market accounts, which are classified as Level 1 under the guidance of Statement of Financial Accounting Standards (SFAS) 157, “Fair Value Measurements.”
Concentrations of Credit Risk
The Company invests excess cash with high credit, quality financial institutions, which bear minimal risk and, by policy, limit the amount of credit exposure to any one financial institution. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company periodically reviews the credit quality of its customers and generally does not require collateral.
Trade Accounts Receivable
The Company classifies as trade accounts receivable amounts due within twelve months, arising from the provision of services in the normal course of business.
Allowance for Credits and Uncollectibles
The Company has service level commitments with certain of its customers. To the extent that such service levels are not achieved, the Company estimates the amount of credits to be issued, based on historical credits issued and known disputes, and records a reduction to revenue, with a corresponding increase in the allowance for credits and uncollectibles.
The Company assesses collectibility of accounts receivable based on a number of factors, including customer payment history and creditworthiness. The Company generally does not request collateral from its customers although in certain cases it may obtain a
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security deposit. The Company maintains an allowance for uncollectibles when evaluating the adequacy of allowances, and specifically analyzes accounts receivable, current economic conditions and trends, historical bad debt write-offs, customer concentrations, customer payment history and creditworthiness, and changes in customer payment terms. Delinquent account balances are charged to expense after management has determined that the likelihood of collection is not probable.
Depreciation, Amortization, and Accretion
Depreciation and amortization expense consists primarily of depreciation of property and equipment and assets held under capital lease, as well as amortization of intangible assets and leasehold improvements. Property, plant, and equipment are recorded at cost and depreciation and amortization are calculated using the straight-line method over the useful lives of the related assets. Software and equipment have useful lives that range between three and fifteen years and leased assets are depreciated over the shorter of their useful lives or lease terms. Accretion expense results from aging of the discounted present value of various liabilities, including asset retirement obligations.
Revenue Recognition
The Company derives the majority of its revenue from recurring revenue streams, consisting primarily of hosting services, which includes managed hosting and colocation, and network services. The Company recognizes revenue for these services as they are provided. Installation fees, although generally billed upon installation, are deferred and recognized ratably over the life of the customer contract. Revenue is recognized when the related service has been provided, there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection is reasonably assured.
In addition, the Company has service level commitments pursuant to individual customer contracts with certain of its customers. To the extent that such service levels are not achieved or are otherwise disputed due to performance or service issues, unfavorable weather, or other service interruptions or conditions, the Company estimates the amount of credits to be issued and records a reduction to revenue, with a corresponding increase in the allowance for credits and uncollectibles. In the event that the Company provides credits or payments to customers related to service level claims, the Company may recover such costs through third party insurance agreements. Insurance proceeds received under these agreements are recorded as an offset to previously recorded revenue reductions.
Cost of Revenue
Operational expenses include rental costs, power costs, costs for hosting space, and maintenance and operations costs for indefeasible rights of use, as well as salaries and related benefits for engineering, service delivery and provisioning, customer service, and operations personnel. Invoices from communications service providers may exceed amounts the Company believes it owes. The Company’s practice is to identify such variances and engage in discussions with the vendors to resolve disputes. Accruals are maintained for the best estimate of the amount that may ultimately be paid.
Equity-Based Compensation
The Company recognizes equity-based compensation in accordance with SFAS 123(R), “Share-Based Payment.” The fair value of total equity-based compensation for stock options and restricted preferred units is calculated using the Black-Scholes option pricing model which utilizes certain assumptions and estimates that have a material impact on the amount of total compensation cost recognized in the Company’s consolidated financial statements. Total equity-based compensation costs for restricted stock units and restricted stock awards are calculated based on the market value of the Company’s common stock on the date of grant. Total equity-based compensation costs are amortized to non-cash equity-based compensation expense over the vesting or performance period of the award, as applicable, which typically ranges from three to four years.
Income Taxes
Income taxes are accounted for using the asset and liability method, which provides for the establishment of deferred tax assets and liabilities for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and for income tax purposes, applying the enacted statutory tax rates in effect for the years in which
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differences are expected to reverse. Valuation allowances are established when it is more likely than not that recorded deferred tax assets will not be realized. The Company has provided a full valuation allowance on deferred tax assets arising primarily from tax loss carryforwards and other potential tax benefits according to SFAS 109, “Accounting for Income Taxes,” because the future realization of such benefit is uncertain. As a result, to the extent that those benefits are realized in future periods, they will favorably affect net income or loss.
Net Income (Loss) per Common Share
The Company presents net income (loss) per common share information in accordance with SFAS 128, “Earnings per Share.” Under the provisions of SFAS 128, basic net income (loss) per common share is computed using the weighted-average number of common shares outstanding during the period, excluding unvested restricted stock awards subject to cancellation. Diluted net income (loss) per common share is computed using the weighted-average number of common shares and, if dilutive, potential common shares outstanding during the period. Potential common shares represent the incremental common shares issuable for stock option and restricted preferred unit exercises, unvested restricted stock units and restricted stock awards that are subject to repurchase or cancellation, and conversion of debt securities. The dilutive effect of outstanding stock options, restricted preferred units, restricted stock units, and restricted stock awards is reflected in diluted net income (loss) per share by application of the treasury stock method while the dilutive effect from convertible securities is by application of the if-converted method.
The following tables set forth the computation of basic and diluted net income (loss) per common share:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||
Net income (loss) | $ | (7,384 | ) | $ | 133,273 | $ | (11,606 | ) | $ | 247,814 | ||||
Add back: Interest expense on convertible notes, net of tax effect | — | 1,715 | — | 1,715 | ||||||||||
Net income (loss) for diluted per share calculation | $ | (7,384 | ) | $ | 134,988 | $ | (11,606 | ) | $ | 249,529 | ||||
Weighted-average shares outstanding – basic | 53,305 | 52,631 | 53,199 | 52,449 | ||||||||||
Effect of dilutive securities:(1) | ||||||||||||||
Shares reserved for convertible notes | — | 2,855 | — | 1,435 | ||||||||||
Stock options(2) | — | 917 | — | 775 | ||||||||||
Restricted preferred units(2) | — | 336 | — | 452 | ||||||||||
Restricted stock units and restricted stock awards(2) | — | 439 | — | 600 | ||||||||||
Weighted-average shares outstanding – diluted (3) | 53,305 | 57,178 | 53,199 | 55,711 | ||||||||||
Net income (loss) per share: | ||||||||||||||
Basic | $ | (0.14 | ) | $ | 2.53 | $ | (0.22 | ) | $ | 4.72 | ||||
Diluted | $ | (0.14 | ) | $ | 2.36 | $ | (0.22 | ) | $ | 4.48 | ||||
(1) | For the three and six months ended June 30, 2008, the effects of including the incremental shares associated with the Convertible Notes and the assumed conversion of dilutive equity instruments into common stock was anti-dilutive and, therefore, excluded from the calculation of diluted net income (loss) per common share. |
(2) | As of June 30, 2008, the Company had outstanding 5.9 million stock options, 0.5 million restricted preferred units, and 0.3 shares of restricted stock units and restricted stock awards. |
(3) | Weighted-average shares outstanding – dilutive for the three and six months ended June 30, 2007 excludes 0.3 million and 0.7 million anti-dilutive shares, respectively. |
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from such estimates and assumptions. Estimates used in the Company’s consolidated financial statements include, among others, the allowance for credits and uncollectibles and assumptions used to value equity-based compensation awards.
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Recently Issued Accounting Standards
In December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R) amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in an acquiree. It also provides disclosure requirements to enable users of financial statements to evaluate the nature and financial effects of a business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively to any future acquisitions. The Company does not believe the adoption of SFAS 141(R) will have a material effect on its consolidated financial position, results of operations, or cash flows.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. This includes qualitative disclosures about objectives for using derivatives by primary risk exposure and by purpose or strategy; information about the volume of the derivative activity; tabular disclosure of the financial statement location and amounts of the gains and losses related to the derivatives; and disclosures about credit-risk related contingent features in derivative agreements. It is effective for fiscal years beginning on or after November 15, 2008, with early adoption encouraged. The Company does not believe the adoption of SFAS 161 will have a material effect on its consolidated financial position, results of operations, or cash flows.
In May 2008, the FASB issued Staff Position APB 14-a, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” This FSP changes the accounting for the Company’s Convertible Notes. Under the new rules, for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity should separately account for the liability and equity components of the instruments to reflect the issuer’s economic interest cost. This will require the reclassification of approximately $65 million from long-term debt to additional paid-in capital, which will be treated as original issue discount of the Convertible Notes. Higher interest expense will result by recognizing the accretion of the discounted carrying value of the Convertible Notes to their face amount as interest expense over the term of the Convertible Notes. The FSP is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, and requires retrospective application to all periods presented. While the FSP does not change the economic substance or cash flow requirements of the Convertible Notes, the Company’s interest expense will increase by approximately $13 million per year.
NOTE 3—SALES OF ASSETS
Content Delivery Network Assets
In January 2007, the Company completed the sale of substantially all of the assets related to its content delivery network services (the CDN Assets) for $132.5 million, after certain working capital adjustments and the assumption of certain liabilities, pursuant to a purchase agreement dated December 23, 2006 (the CDN Purchase Agreement). The transaction resulted in net proceeds of $128.3 million, after transaction fees, related costs, and working capital adjustments and the Company recorded a gain on sale of $125.2 million for the six months ended June 30, 2007.
The CDN Purchase Agreement contains representations, warranties and covenants of the Company, including certain tax and intellectual property representations and warranties. In connection therewith, the Company agreed to indemnify the buyer for a period of up to six years for breaches of certain intellectual property representations, warranties, and covenants up to, but not to exceed, the amount of the purchase price, net of working capital adjustments, or $132.5 million. The Company believes the potential for performance under the indemnification is unlikely and, therefore, has not recorded any related liabilities in its accompanying consolidated balance sheet as of, or at any time prior to, June 30, 2008.
Data Center Assets
In June 2007, the Company sold assets related to two of its data centers located in Santa Clara, California for $190.2 million in cash, before fees, the assumption and forgiveness of certain liabilities, and the assignment of an operating lease associated with the facilities. In connection with the sale, the Company recorded a gain on sale of $180.5 million for the year ended December 31, 2007. The Company recorded revenue of $16.5 million related to these data centers in the first half of 2007.
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NOTE 4—PROPERTY AND EQUIPMENT
The following table presents property and equipment, by major category, as of June 30, 2008 and December 31, 2007:
June 30, 2008 | December 31, 2007 | |||||||
Communications and data center equipment | $ | 499,787 | $ | 465,047 | ||||
Facilities and leasehold improvements | 579,102 | 487,365 | ||||||
Software | 62,164 | 52,999 | ||||||
Office equipment | 34,215 | 32,990 | ||||||
1,175,268 | 1,038,401 | |||||||
Less accumulated depreciation and amortization | (483,108 | ) | (421,817 | ) | ||||
Property and equipment, net | $ | 692,160 | $ | 616,584 | ||||
Depreciation and amortization expense for property and equipment was $32.7 million and $21.0 million for the three months ended June 30, 2008 and 2007, respectively, and $62.9 million and $40.8 million for the six months ended June 30, 2008 and 2007, respectively.
The following table presents property and equipment held under capital and financing method leases, by major category, which represent components of property and equipment included in the table above, as of June 30, 2008 and December 31, 2007:
June 30, 2008 | December 31, 2007 | |||||||
Communications and data center equipment | $ | 96,337 | $ | 88,366 | ||||
Facilities and leasehold improvements | 95,330 | 95,330 | ||||||
191,667 | 183,696 | |||||||
Less accumulated amortization | (98,496 | ) | (91,888 | ) | ||||
Property and equipment held under capital and financing method leases, net | $ | 93,171 | $ | 91,808 | ||||
The portion of total depreciation and amortization expense attributable to assets held under capital and financing method leases was $3.4 million and $1.9 million for the three months ended June 30, 2008 and 2007, respectively and $6.6 million and $3.8 million for the six months ended June 30, 2008 and 2007, respectively.
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NOTE 5—LONG-TERM DEBT
The following table presents long-term debt as of June 30, 2008 and December 31, 2007:
June 30, 2008 | December 31, 2007 | |||||
Convertible Notes | $ | 345,000 | $ | 345,000 | ||
Cisco loan facility, net of current portion of $6,600 and $1,768, respectively | 24,095 | 6,594 | ||||
Lombard loan facility | 33,287 | — | ||||
Revolving credit facility | — | — | ||||
Long-term debt | $ | 402,382 | $ | 351,594 | ||
Convertible Notes
In May 2007, the Company issued $345.0 million aggregate principal amount of 3.0% Convertible Senior Notes due May 15, 2012 (the Convertible Notes). Interest is payable semi-annually on May 15 and November 15 of each year, commencing November 15, 2007.
The Convertible Notes are governed by an Indenture dated May 9, 2007, between the Company, as issuer, and The Bank of New York, as trustee (the Indenture). The Indenture does not contain any financial covenants or restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by the Company. The Convertible Notes are unsecured and are effectively subordinated to the Company’s existing or future secured debts to the extent of the assets securing such debt.
Upon conversion, holders will receive, at the Company’s election, cash, shares of the Company’s common stock, or a combination thereof. However, the Company may at any time irrevocably elect for the remaining term of the Convertible Notes to satisfy its conversion obligation in cash up to 100% of the principal amount of the Convertible Notes converted, with any remaining amount to be satisfied, at the Company’s election, in cash, shares of its common stock, or a combination thereof.
The initial conversion rate is 14.2086 shares of common stock per $1,000 principal amount of Convertible Notes, subject to adjustment. This represents an initial conversion price of approximately $70.38 per share of common stock. Holders of the Notes may convert their Convertible Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, due to the conversion formulas associated with the Convertible Notes, if the Company’s stock is trading at levels exceeding the conversion price per share of common stock, and if the Company elects to settle the obligation in cash, additional consideration beyond the $345.0 million of gross proceeds received would be required.
The Company has determined that the Convertible Notes contain an embedded derivative requiring bifurcation and separate accounting treatment. Such derivative had a de minimis fair value as of June 30, 2008 and as a result, the Company has not recorded any related amounts in the condensed consolidated financial statements. The Company will remeasure this embedded derivative each reporting period, as applicable, and changes in fair value will be reported in the consolidated statement of operations. The Company has concluded that the contingently issuable shares are dilutive for diluted net income (loss) per common share calculations using the “if-converted” method.
In connection with the issuance of the Convertible Notes, debt issuance costs totaling $8.9 million were deferred and are being amortized to interest expense through the maturity date of the Convertible Notes, May 15, 2012. Debt issuance costs related to the Convertible Notes, net of accumulated amortization, were $7.0 million as of June 30, 2008.
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Subordinated Notes
In June 2007, the Company completed the early extinguishment of its Series A Subordinated Notes by making cash payments totaling $342.5 million to the note holders. Such payments included the original principal of $200.0 million, paid-in-kind and make-whole interest of $147.6 million, and an early extinguishment premium of $3.5 million, offset by a negotiated discount to the original contractual extinguishment provisions of $8.6 million. In connection with the extinguishment, the Company wrote-off the remaining unamortized original issue discount of $23.8 million and the remaining unamortized issuance costs of $0.5 million, and recorded a loss on debt extinguishment of $45.1 million in June 2007.
Credit Facilities
Revolving Facility. The Company maintains an $85.0 million revolving credit facility (the Revolving Facility), which includes a $20.0 million letter of credit provision. The Revolving Facility may be used for working capital and other general corporate purposes. The Revolving Facility matures, and all outstanding borrowings and unpaid interest are due, on December 9, 2008. On or before the maturity date, the Company expects to renew the Revolving Facility with an agreement similar in terms. In addition, all outstanding borrowings are subject to mandatory prepayment upon certain events, including the availability of less than $7.0 million in borrowing capacity and qualified cash balances, as defined by the Revolving Facility agreement. The Revolving Facility is secured by substantially all of the Company’s domestic properties and assets and the Company may terminate the Revolving Facility prior to maturity. As of June 30, 2008, the Company had no outstanding principal amounts under the Revolving Facility, but had outstanding letters of credit of $11.0 million, and unused availability of $74.0 million. Unused commitments on the Revolving Facility are subject to a 0.5% annual commitment fee.
Cisco Loan Agreement and Lease Facility.The Company maintains a loan and security agreement (the Loan Agreement) and a master lease agreement (the Lease Agreement) with Cisco Systems Capital Corporation. The Loan Agreement provides for borrowings of up to $33.0 million, at an annual interest rate of 6.50%, to purchase network equipment. The Lease Agreement provides a lease facility (the Lease Facility) to purchase equipment with borrowings up to $10.0 million, at an annual interest rate based on two-year U.S. Treasury Notes. The Company also has commitments for the availability of an additional $10.0 million in borrowings. The effective interest rate on current outstanding borrowings ranges from 5.52% to 7.25%. The Company may utilize up to $3.0 million of the Lease Facility for third party manufactured equipment. The obligations under the Loan Agreement are secured by a first-priority security interest in the equipment. As of June 30, 2008, the Company had $33.0 million in borrowings under the Loan Agreement and $17.9 million under the Lease Facility.
Lombard Loan Agreement. In June 2008, a subsidiary of the Company, SAVVIS UK Ltd., entered into a loan agreement (the UK Loan Agreement) with Lombard North Central Plc. The UK Loan Agreement provides for borrowings of up to £35.0 million to be used in connection with the construction and development of a new data center in the United Kingdom. The UK Loan Agreement allows for advances from the lender to finance certain payments due to the contractor and others during the construction period. The UK Loan Agreement has a five-year term and requires quarterly installments of interest only for the first two years and quarterly installments of principal and interest for the remainder of the term. The Company may elect to pay interest from the construction completion date, anticipated to be in October 2008, at a rate equal to the one or three month GBP Libor plus 2.80% for 12 month periods, or they may elect to fix the interest rate at the available lender swap rate plus 2.80% for a minimum of three years up to the remaining loan period or such shorter six month increments. They are also required to enter into a hedge agreement to provide interest rate protection if GBP Libor equals or exceeds 8.0%. The Company has guaranteed the obligations of SAVVIS UK under the UK Loan Agreement and the obligations are secured by a first priority security interest in substantially all of SAVVIS UK’s current data center assets and certain future assets which will be located in the new data center. In addition, the Company is required to maintain a letter of credit ranging from £7.0 million to £14.0 million for a minimum of two years from the construction completion date. The UK Loan may be prepaid, in whole or in part, without prepayment penalty, subject to certain breakage fees, if any. As of June 30, 2008, outstanding borrowings under the UK Loan Agreement totaled £16.9 million, or approximately $33.3 million using the effective exchange rate of 1.9663 on June 26, 2008, and the effective interest rate was 8.30%.
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Debt Covenants
The provisions of the Company’s debt agreements contain a number of covenants including, but not limited to, maintaining certain financial conditions, restricting or limiting the Company’s ability to incur more debt, pay dividends, and repurchase stock (subject to financial measures and other conditions). The ability to comply with these provisions may be affected by events beyond the Company’s control. The breach of any of these covenants could result in a default under the Company’s debt agreements and could trigger acceleration of repayment. As of and during the six months ended June 30, 2008 and the year ended December 31, 2007, the Company was in compliance with all applicable covenants under the debt agreements.
Future Principal Payments
As of June 30, 2008, aggregate future principal payments of long-term debt were $3.3 million for the remainder of the year ended December 31, 2008, $6.6 million for the year ended December 31, 2009, $10.2 for the year ended December 31, 2010, $24.3 million for the year ended December 31, 2011, $378.1 million for the year ended December 31, 2012, and $22.0 million for the year ended December 31, 2013. Depending on settlement options at the Company’s election, the Convertible Notes may be settled in cash, shares, or a combination thereof. The weighted-average interest rate applicable to outstanding borrowings was 3.7% and 3.1% as of June 30, 2008 and December 31, 2007, respectively.
NOTE 6—CAPITAL AND FINANCING METHOD LEASE OBLIGATIONS
The following table presents future minimum payments due under capital and financing method leases as of June 30, 2008:
Remainder of 2008 | $ | 13,398 | ||
2009 | 26,085 | |||
2010 | 26,152 | |||
2011 | 26,786 | |||
2012 | 26,877 | |||
Thereafter | 199,344 | |||
Total capital and financing method lease obligations | 318,642 | |||
Less amount representing interest | (197,123 | ) | ||
Less current portion | (6,024 | ) | ||
Capital and financing method lease obligations, net | $ | 115,495 | ||
Financing method lease obligation payments represent interest payments over the term of the lease. Of the remaining obligation of $51.9 million at June 30, 2008, $50.6 million represents a deferred gain that will be realized upon termination of the lease in accordance with accounting rules for financing method leases. During March 2008, pursuant to the terms of the existing lease agreement, an automatic extension of the lease term occurred, extending the lease termination date, and recognition of the deferred gain, to February 2022.
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NOTE 7—OPERATING LEASES
The following table presents future minimum payments under operating leases as of June 30, 2008:
Remainder of 2008 | $ | 34,836 | |
2009 | 63,807 | ||
2010 | 58,168 | ||
2011 | 50,717 | ||
2012 | 47,905 | ||
Thereafter | 219,894 | ||
Total future minimum lease payments | $ | 475,327 | |
Rental expense under operating leases was $18.8 million and $16.1 million for the three months ended June 30, 2008 and 2007, respectively, and $34.5 million and $35.0 million for the six months ended June 30, 2008 and 2007, respectively.
NOTE 8—OTHER ACCRUED LIABILITIES
The following table presents the components of other current and non-current accrued liabilities as of June 30, 2008 and December 31, 2007:
June 30, 2008 | December 31, 2007 | |||||
Current other accrued liabilities: | ||||||
Wages, employee benefits, and related taxes | $ | 13,999 | $ | 26,995 | ||
Deferred revenue | 23,194 | 18,827 | ||||
Taxes payable | 5,849 | 4,816 | ||||
Other current liabilities | 24,209 | 50,781 | ||||
Total current other accrued liabilities | $ | 67,251 | $ | 101,419 | ||
Non-current other accrued liabilities: | ||||||
Deferred revenue | $ | 8,079 | $ | 5,044 | ||
Acquired contractual obligations in excess of fair value and other | 16,690 | 18,382 | ||||
Asset retirement obligations | 25,935 | 23,386 | ||||
Other non-current liabilities | 12,324 | 12,370 | ||||
Total non-current other accrued liabilities | $ | 63,028 | $ | 59,182 | ||
Acquired contractual obligations in excess of fair value and other as of June 30, 2008 and December 31, 2007, represent amounts remaining from acquisitions related to fair market value adjustments of acquired facility leases and idle capacity on acquired long-term maintenance and power contracts that the Company did not intend to utilize.
NOTE 9—COMMITMENTS, CONTINGENCIES, AND OFF-BALANCE SHEET ARRANGEMENTS
The Company’s customer contracts generally span multiple periods, which results in the Company entering into arrangements with various suppliers of communications services that require the Company to maintain minimum spending levels, some of which increase over time, to secure favorable pricing terms. The Company’s remaining aggregate minimum spending levels, allocated ratably over the terms of such contracts, are $36.2 million, $45.0 million, $34.5 million, $19.4 million, $13.6 million, and $69.8 million during the years ended December 31, 2008, 2009, 2010, 2011, 2012, and thereafter, respectively. Should the Company not meet the minimum spending levels in any given term, decreasing termination liabilities representing a percentage of the remaining contractual amounts may become immediately due and payable. Furthermore, certain of these termination liabilities are potentially subject to reduction should the Company experience the loss of a major customer or suffer a loss of revenue from a general economic downturn. Before considering the effects of any potential reductions for the business downturn provisions, if the Company had terminated all of these agreements as of June 30, 2008, the maximum termination liability would have been $218.5 million. To mitigate this exposure, when possible, the Company aligns its minimum spending commitments with customer revenue commitments for related services.
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In the normal course of business, the Company is a party to certain guarantees and financial instruments with off-balance sheet risk as they are not reflected in the accompanying consolidated balance sheets, such as letters of credit, indemnifications, and operating leases, under which the majority of the Company’s facilities are leased. The agreements associated with such guarantees and financial instruments mature at various dates through December 2022, and may be renewed as circumstances warrant. The Company’s financial instruments are valued based on the estimated amount of exposure and the likelihood of performance being required. In management’s past experience, no claims have been made against these financial instruments nor does it expect the exposure to material losses resulting therefrom to be anything other than remote. As a result, the Company determined such financial instruments do not have significant value and has not recorded any related amounts in its consolidated financial statements. As of June 30, 2008, the Company had $11.0 million in letters of credit outstanding under the Revolving Facility, pledged as collateral to primarily support certain facility leases and utility agreements. Also, in connection with its sale of the CDN Assets, the Company agreed to indemnify the purchaser should it incur certain losses due to a breach of the Company’s representations and warranties.
The Company is subject to various legal proceedings and actions arising in the normal course of its business. While the results of all such proceedings and actions cannot be predicted, management believes, based on facts known to management today, that the ultimate outcome of all such proceedings and actions will not have a material adverse effect on the Company’s consolidated financial position, results of operation, or cash flows.
One such action in which the Company is the defendant is an action brought by SiteLite Holdings, Inc. (SiteLite) in the Superior Court of California, County of Orange. SiteLite alleges several business torts and statutory violations related to a contractual relationship with the Company that they terminated in 2005, including defamation and false advertising, theft of intellectual property and trade secrets, and breach of contract. The Company has agreed to settle all claims made by SiteLite for an immaterial amount. A hearing to consider the dismissal of the matter is scheduled for August.
The Company has employment agreements with key executive officers that contain provisions with regard to base salary, bonus, equity-based compensation, and other employee benefits. These agreements also provide for severance benefits in the event of employment termination or a change in control of the Company.
NOTE 10—COMPREHENSIVE INCOME (LOSS)
The following table presents comprehensive income (loss) for the three and six months ended June 30, 2008 and 2007:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||
Net income (loss) | $ | (7,384 | ) | $ | 133,273 | $ | (11,606 | ) | $ | 247,814 | ||||
Foreign currency translation adjustments | (274 | ) | 938 | (3,321 | ) | 2,045 | ||||||||
Comprehensive income (loss) | $ | (7,658 | ) | $ | 134,211 | $ | (14,927 | ) | $ | 249,859 | ||||
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NOTE 11—EQUITY-BASED COMPENSATION
As of June 30, 2008, the Company has equity-based compensation plans which provide for the grant of stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units, dividend equivalent rights, and cash awards. Any of these awards may be granted as incentives to reward and encourage individual contributions to the Company. As of June 30, 2008, the plans had 13.7 million shares authorized for grants of equity-based instruments, of which 6.7 million shares were associated with outstanding instruments. Stock options generally expire 10 years from the grant date and have graded vesting over four years. Restricted stock units (RSUs) granted to certain employees have included performance features and graded vesting expected over periods up to four years. Restricted preferred units (RPUs) granted to certain executives have graded vesting over four years. Restricted stock awards (RSAs) granted to non-employee directors have vesting periods ranging from one to three years. The Company generally issues new shares of common stock upon exercise of equity-based compensation awards. As of June 30, 2008, the Company had $72.6 million of unrecognized compensation cost which is expected to be recognized over a weighted-average period of 2.5 years.
The following table presents information associated with the Company’s equity-based compensation awards for the six months ended June 30, 2008 (in thousands):
Restricted Stock Units | Restricted Stock | Options and RPUs | |||||||
Outstanding at beginning of period | 592 | 22 | 5,755 | ||||||
Granted | — | 19 | 1,692 | ||||||
Delivered/Exercised | (295 | ) | (11 | ) | (386 | ) | |||
Forfeited | (50 | ) | — | (662 | ) | ||||
Outstanding at end of period | 247 | 30 | 6,399 | ||||||
In the first six months of 2008 and 2007, certain RSUs and RPUs became vested and were delivered to employees. Under the terms of the award agreements, the Company withheld 0.1 million and 0.2 million shares, respectively, of common stock upon vesting to satisfy employee tax withholding requirements that arose in connection with such vesting. As a result, the Company cash funded the statutory minimum tax withholdings which resulted in a reduction of additional paid-in capital of $2.2 million and $10.1 million for the six months ended June 30, 2008 and 2007, respectively.
NOTE 12—INCOME TAXES
For the six months ended June 30, 2008, the Company recorded income tax expense of $0.9 million on a loss before income taxes of $10.7 million. Comparatively, for the year ended December 31, 2007, the Company recorded income tax expense of $1.4 million on income before income taxes of $252.0 million. Management currently anticipates a pretax loss in 2008, but also income tax expense primarily due to certain jurisdictional alternative minimum taxes on income. Accordingly, income tax expense for 2008 is calculated on a discrete quarterly basis which more accurately reflects income tax expense as it is incurred. As of December 31, 2007, the Company had available U.S. net operating loss (NOL) carryforwards totaling $211.5 million.
Aside from the projected current year utilization, the Company maintains a full valuation allowance on deferred tax assets arising primarily from NOL carryforwards and other tax attributes because the future realization of such benefits is uncertain. As a result, to the extent that those benefits are realized in future periods, they will favorably affect tax expense and net income.
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NOTE 13—INDUSTRY SEGMENT AND GEOGRAPHIC REPORTING
SFAS 131, “Disclosure about Segments of an Enterprise and Related Information,” established standards for reporting information about operating segments in annual financial statements and in interim financial reports issued to shareholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment.
The Company’s operations are managed on the basis of three geographic regions, Americas, EMEA (Europe, Middle East, and Africa) and Asia. Management evaluates the performance of such regions and allocates resources to them based primarily on revenue. The Company has evaluated the criteria for aggregation of its geographic regions under SFAS 131 and believes it meets each of the respective criteria set forth therein. The Company’s geographic regions maintain similar sales forces, each of which offer all of the Company’s services due to the similar nature of such services. In addition, the geographic regions utilize similar means for delivering the Company’s services; have similarity in the types of customer receiving the products and services; and distribute the Company’s services over a unified network and using comparable data center technology. In light of these factors, management has determined that the Company has one reportable segment.
Selected financial information for the Company’s geographic regions is presented below. For the three months ended June 30, 2008 and 2007, revenue earned in the U.S. represented approximately 84% and 87% of total revenue, respectively, and 84% and 87% for the six months ended June 30, 2008 and 2007, respectively.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||
Revenue: | ||||||||||||
Americas | $ | 178,947 | $ | 174,068 | $ | 350,413 | $ | 351,513 | ||||
EMEA | 25,679 | 20,333 | 49,787 | 41,522 | ||||||||
Asia | 8,315 | 6,153 | 16,024 | 12,767 | ||||||||
Total revenue | $ | 212,941 | $ | 200,554 | $ | 416,224 | $ | 405,802 | ||||
June 30, 2008 | December 31, 2007 | |||||
Property and equipment, net: | ||||||
Americas | $ | 614,561 | �� | $ | 577,553 | |
EMEA | 62,149 | 26,462 | ||||
Asia | 15,450 | 12,569 | ||||
Total property and equipment, net | $ | 692,160 | $ | 616,584 | ||
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated condensed financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:
• | Executive Summary. Discussion of our business and overall analysis of financial and other highlights affecting the company. |
• | Significant Transactions. An overview of those significant transactions that have occurred recently that have an impact on our financial results. |
• | Results of Operations. An analysis of our financial results comparing the three months ended June 30, 2008 to the three months ended June 30, 2007, and the six months ended June 30, 2008 to the six months ended June 30, 2007. |
• | Liquidity and Capital Resources. An analysis of changes in our cash flows and a discussion of our financial condition. |
• | Critical Accounting Estimates. Accounting estimates that we believe are most important to understanding the assumptions and judgments incorporated in our financial results. |
You should read the following discussion in conjunction with our accompanying unaudited condensed consolidated financial statements and notes thereto, and our audited consolidated financial statements, notes thereto and MD&A as of and for the year ended December 31, 2007, included in our Annual Report on Form 10-K for such period as filed with the U.S. Securities and Exchange Commission. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) based on current expectations which involve risks and uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. For a discussion of the material factors that could cause actual results to differ materially from the forward-looking statements, you should read “Risk Factors” included in this Form 10-Q.
EXECUTIVE SUMMARY
We provide information technology, or IT, services including managed hosting, utility computing, colocation, managed security, network, and professional services through our global infrastructure to businesses and government agencies around the world. Our services are designed to offer a flexible, comprehensive IT solution that meets the specific IT infrastructure and business needs of our customers. Our suite of products can be purchased individually, in various combinations, or as part of a total or partial outsourcing arrangement. Our point solutions meet the specific needs of customers who require control of their physical assets, while our managed hosting solution provides customers with access to our services and infrastructure without the upfront capital costs associated with equipment acquisition. By partnering with us, our customers are able to drive down the costs of acquiring and managing IT infrastructure, achieve operational efficiency through the use of virtualized technology, and focus their resources on their core business while we ensure the performance of their IT infrastructure. We have approximately 4,100 customers across all industries including the financial services, media and entertainment, software, and government sectors.
Our Services
Although we operate in one operating segment across three geographic locations, we report our revenue in two categories of services: (1) hosting services and (2) network services. In 2007, we previously reported revenue in a third category of service, other services. Revenue from other services was eliminated in June 2007 primarily due to customers transitioning to the acquirer of our content delivery network assets, or CDN Assets. We continue to include a description of other services to allow investors to compare prior periods.
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Hosting Services provide the core facilities, compute, data storage and network infrastructure on which to run business applications. Our hosting services are comprised of colocation and managed hosting and allow our customers to choose which parts of their IT infrastructure they own and operate versus those that we own and operate for them. Customers can scale their use of our services as their own requirements grow and as customers learn the benefits of outsourcing IT infrastructure management.
• | Colocation is designed for customers seeking data center space and power for their server and networking equipment needs. We manage 28 data centers located in the United States, Europe, and Asia with approximately 1.36 million square feet of gross raised floor space, providing our customers around the world with a secure, high-powered, purpose-built location for their IT equipment. |
• | Managed Hosting Services provide a fully managed solution for a customer’s server, data storage, and network equipment needs. In providing our managed hosting services, we deploy industry standard hardware and software platforms that are installed in our data centers to deliver the physical or virtualized services necessary for operating our customers’ applications. We provide our managed hosting services, including related technology and operations support, on a monthly fee basis. Managed hosting also includes utility compute and storage, managed security services, and professional services. |
Network Services are comprised of our managed network services, including managed IP VPN, High Speed Layer-2 VPN and the services marketed under our WAM!Net brand; hosting area network, or HAN; and bandwidth services. We recently enhanced the performance of our network services by completing the deployment of our Application Transport Network, which provides an enhanced architecture to our network. This architecture ties together our data centers to facilitate a wide variety of integrated network and hosting solutions, including business continuity and disaster recovery, and ties together our hosting and customer sites into a single IP VPN solution.
Other Services were comprised primarily of streaming and caching services that we provided pursuant to a reseller agreement that we entered into with Level 3 Communications, Inc., or Level 3, in connection with the sale of our CDN Assets, and the services that we provided under our contract with Moneyline Telerate Holdings, Inc., or Telerate, which contract was assigned to Reuters in June 2005 in connection with Reuters’ acquisition of Telerate. Revenue from other services was eliminated in June 2007 primarily due to CDN customers having transitioned to Level 3 and the completion of the migration of Telerate to Reuters’ products.
Business Trends and Outlook
Our financial results continue to be affected by competition in our industry, and we expect these competitive factors to continue to affect the prices for our services and our results of operations. Price pressures and demand vary by product and service.
Demand for our colocation services and the network services associated with our colocation services remains strong, and we believe that the average selling price we will realize from our colocation services will remain at levels higher than they have been in the past due to the continued strong demand for high grade data center space. As previously disclosed, we opened seven new high grade data centers in the last year due to the continued solid demand for colocation services in recent years. The prices per square foot that we are able to charge for these new data centers are higher than our older data centers due primarily to higher power capacity at these new facilities. While we believe demand for our older, lower power capacity data centers will remain solid, we believe that many customers will purchase colocation services at the new facilities despite the higher prices due to customers’ use of new IT equipment, which has improved processing capability but also requires higher power capacity. As a result, we expect that the new data centers will contribute significantly to our total future revenue. Factors that could cause demand to be different from our expectations and the resulting revenue include changes in customer order patterns, including order cancellations, and changes in business and economic conditions.
While we anticipate continued strong demand for colocation services, we have recently begun to experience a slowing in sales of our managed hosting services. Historically, the sales process for our managed hosting services required a six to nine month sales cycle, and recently, this sales cycle has lengthened to nine to twelve months. We believe that this slowing may be due to the critical nature of our managed hosting services to our customers’ IT infrastructure and the consequential lengthening of our customers’ internal decision-making process, as well as our customers’ possible uncertainty regarding general economic conditions in the U.S.
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In addition, we continue to experience pricing pressure in the network services sector. Prices for our network services have decreased over the past several years, and we have seen a decline in the demand for some of our network services due to increased competition and the introduction of new technologies by large telecommunications providers.
Based on current economic conditions and demand for our services, we continue to remain focused on initiatives that we believe will grow our business, including:
• | Increasing the quality of our infrastructure and the reliability of our services and client satisfaction through the continued expansion of high grade data center space; |
• | Improving the efficiencies in our general and administrative areas through process improvement and increasing overall productivity; and |
• | Exploring strategic options for those services that have experienced relatively slow growth in the past in order to allow us to focus on our high growth services. |
We regularly review our revenue, gross profit, gross margin and income (loss) from operations to evaluate our financial results and overall performance of our business and to assess trends that may affect our business. The following table presents an overview of these indicators for the periods indicated (dollars in thousands):
Three Months Ended | ||||||||||||||||||||
June 30, 2008 | March 31, 2008 | December 31, 2007 | September 30, 2007 | June 30, 2007 | ||||||||||||||||
Revenue | $ | 212,941 | $ | 203,283 | $ | 197,769 | $ | 190,262 | $ | 200,554 | ||||||||||
Gross profit(1) | 90,069 | 84,632 | 86,214 | 77,914 | 86,799 | |||||||||||||||
Gross margin(2) | 42 | % | 42 | % | 44 | % | 41 | % | 43 | % | ||||||||||
Income (loss) from operations(3)(4) | 867 | (420 | ) | 2,774 | 3,734 | 192,537 |
(1) | Represents total revenue less cost of revenue, excluding depreciation, amortization, and accretion, which is reported separately. |
(2) | Represents gross profit, as defined above, as a percentage of revenue. |
(3) | Includes non-cash equity-based compensation expense of $9.6 million, $8.9 million, $9.0 million, $8.7 million, and $8.2 million, respectively. |
(4) | Includes the gain on sale of certain data center assets of $180.8 million for the three months ended June 30, 2007. |
Revenue
Our total revenue for the three months ended June 30, 2008, increased 6% from the three months ended June 30, 2007. Hosting revenue increased $20.1 million, or 17%, partially offset by a $3.4 million decline of network services revenue and the elimination of other services revenue of $4.2 million.
The increase in hosting revenue reflected added colocation revenue from new and existing data centers and continued demand for managed hosting services. Managed hosting services represented 30% of total revenue for the three months ended June 30, 2008, compared to 25% for the three months ended June 30, 2007.
Network services revenue consists of revenue from managed IP VPN services, HAN services, and bandwidth services to enterprise and wholesale customers. Network services revenue represented 34% of total revenue for the three months ended June 30, 2008, compared to 38% for the three months ended June 30, 2007. HAN services revenues increased $2.4 million, but this increase was offset by the declines in bandwidth volumes and in managed IP VPN revenue.
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Other services revenue was eliminated in the last half of 2007. The $4.2 million of other services revenue for the three months ended June 30, 2007 included revenue from Telerate, which migrated its customers to Reuters’ products in 2007, and CDN revenue, which was eliminated in connection with our sale of the CDN Assets to Level 3 in January 2007.
The majority of our total revenue continues to be generated from commercial customers rather than customers in the government sector. Revenue generated from commercial customers was approximately 97% of our total revenue for the three months ended June 30, 2008.
Gross Profit and Gross Margin
Among other financial measures, we use gross profit, defined as revenue less cost of revenue, excluding depreciation, amortization, and accretion, which is reported separately, and gross margin, defined as gross profit as a percentage of revenue, to evaluate our business. Gross profit was $90.1 million for the three months ended June 30, 2008, an increase of $3.3 million, or 4%, from $86.8 million for the three months ended June 30, 2007. This increase in gross profit was the result of an increase in revenue, partially offset by an increase in cost of revenue due primarily to increased costs related to new and expanded data centers. Gross margin was 42% for the three months ended June 30, 2008 compared to 43% for the three months ended June 30, 2007.
Income (Loss) from Operations
Income from operations was $0.9 million for the three months ended June 30, 2008, a decrease of $191.6 million, compared to income of $192.5 million for the three months ended June 30, 2007. Results for the quarter ended June 30, 2007 included the gain on sale of our data center assets for $180.8 million. Excluding this gain, income from operations was $11.7 million for the three months ended June 30, 2007. Excluding the gain, the $10.8 million decrease in income from operations was primarily driven by an $11.4 million increase in depreciation and amortization expense, and other costs to support growth in the business.
SIGNIFICANT TRANSACTIONS
Lombard Loan Agreement
In June 2008, one of our subsidiaries, SAVVIS UK Ltd., entered into a loan agreement (the UK Loan Agreement) with Lombard North Central Plc. The UK Loan Agreement provides for borrowings of up to £35.0 million to be used in connection with the construction and development of a new data center in the United Kingdom. The UK Loan Agreement allows for advances from the lender to finance certain payments due to the contractor and others during the construction period. The UK Loan Agreement has a five-year term and requires quarterly installments of interest only for the first two years and quarterly installments of principal and interest for the remainder of the term. We may elect to pay interest from the construction completion date, anticipated to be in October 2008, at a rate equal to the one or three month GBP Libor plus 2.80% for 12 month periods, or we may elect to fix the interest rate at the available lender swap rate plus 2.80% for a minimum of three years up to the remaining loan period or such shorter six month increments. We are also required to enter into a hedge agreement to provide interest rate protection if GBP Libor equals or exceeds 8.0%. We have guaranteed the obligations of SAVVIS UK under the UK Loan Agreement and the obligations are secured by a first priority security interest in substantially all of SAVVIS UK’s current data center assets and certain future assets which will be located in the new data center. In addition, we are required to maintain a letter of credit ranging from £7.0 million to £14.0 million for a minimum of two years from the construction completion date. As of June 30, 2008, outstanding borrowings under the UK Loan Agreement totaled £16.9 million, or approximately $33.3 million using the effective exchange rate of 1.9663 on June 26, 2008, and the effective interest rate was 8.30%.
Debt Extinguishment
In June 2007, we completed an early extinguishment of our Series A Subordinated Notes (the Subordinated Notes). We made cash payments totaling $342.5 million to the note holders which included the original principal of $200.0 million, paid-in-kind and make-whole interest of $147.6 million, an early extinguishment premium of $3.5 million, and a negotiated discount to the original contractual extinguishment provisions of $8.6 million. In connection with the extinguishment, we wrote-off the unamortized original issue discount of $23.8 million and the remaining unamortized issuance costs of $0.5 million, and recorded a loss on debt extinguishment of $45.1 million for the three and six months ended June 30, 2007.
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Sale of Data Center Assets
In June 2007, we sold assets related to two of our data centers located in Santa Clara, California for $190.2 million in cash before fees, the assumption and forgiveness of certain liabilities, including $10.4 million of previously advanced revenue, and the assignment of an operating lease associated with the facilities. In connection with the sale, we recorded a gain on sale of $180.5 million for the year ended December 31, 2007. We recorded revenue of $16.5 million related to these data centers in the first half of 2007.
Sale of Content Delivery Network Assets
In January 2007, we completed the sale of substantially all of the assets related to our CDN services for $132.5 million, after certain working capital adjustments and the assumption of certain liabilities, pursuant to a purchase agreement dated December 23, 2006. The transaction resulted in net proceeds of $128.3 million, after transaction fees, related costs, and working capital adjustments and we recorded a gain on sale of $125.2 million for the six months ended June 30, 2007.
RESULTS OF OPERATIONS
The historical financial information included in this Form 10-Q is not intended to represent the consolidated results of operations, financial position, or cash flows that may be achieved in the future.
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
Executive Summary of Results of Operations
Revenue increased $12.4 million, or 6%, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, primarily resulting from higher revenue from colocation and managed hosting services, partially offset by a $3.4 million decline of network services revenue and the elimination of other services revenue. Income from operations declined $191.6 million, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, which included the gain on sale of data center assets of $180.8 million. Excluding the gain, the decrease in income from operations of $10.8 million was due primarily to an increase in depreciation and amortization expense and other costs to support growth in the business. Loss before income taxes for the three months ended June 30, 2008 was $7.3 million. Excluding the gain on the sale of the data center assets, loss before income taxes was $49.2 million for the three months ended June 30, 2007. The improvement of $41.9 million in 2008 was largely the result of a $45.1 million loss in 2007 on the extinguishment of our Subordinated Notes.
Revenue. The following table presents revenue by major service category (dollars in thousands):
Three Months Ended June 30, | |||||||||||||
2008 | 2007 | Dollar Change | Percentage Change | ||||||||||
Revenue: | |||||||||||||
Colocation | $ | 74,762 | $ | 68,404 | $ | 6,358 | 9 | % | |||||
Managed hosting | 64,714 | 51,005 | 13,709 | 27 | % | ||||||||
Total hosting | 139,476 | 119,409 | 20,067 | 17 | % | ||||||||
Network services | 73,465 | 76,900 | (3,435 | ) | (4 | )% | |||||||
Other services | — | 4,245 | (4,245 | ) | (100 | )% | |||||||
Total revenue | $ | 212,941 | $ | 200,554 | $ | 12,387 | 6 | % | |||||
Revenue was $212.9 million for the three months ended June 30, 2008, an increase of $12.4 million, or 6%, from $200.5 million for the three months ended June 30, 2007. Hosting revenue was $139.5 million for the three months ended June 30, 2008, an increase of $20.1 million, or 17%, from $119.4 million for the three months ended June 30, 2007. The increase was due to revenue growth of $13.7 million in our managed hosting offerings, primarily from utility computing and professional services, and a $6.4 million increase in colocation revenue that resulted from more favorable pricing in sales of reclaimed space and sales into new and expanded data centers, partially offset by the absence of revenue from data center assets sold in June 2007, which
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contributed $8.3 million in revenue to the prior year quarter. Network services revenue was $73.5 million for the three months ended June 30, 2008, a decrease of $3.4 million, or 4%, from $76.9 million for the three months ended June 30, 2007. The decrease was driven by a $4.4 million decline in enterprise and wholesale bandwidth volumes and managed IP VPN revenue. Other services revenue was eliminated in the second half of 2007, due to CDN customers migrating to Level 3 and Telerate completing its transition to Reuters’ products. Other services revenue contributed $4.2 million for the three months ended June 30, 2007.
Cost of Revenue. Cost of revenue includes costs of leasing local access lines to connect customers to our Points of Presence, or PoPs; leasing backbone circuits to interconnect our PoPs; indefeasible rights of use, operations and maintenance; rental costs, utilities, and other operating costs for hosting space; and salaries and related benefits for engineering, service delivery and provisioning, customer service, consulting services and operations personnel who maintain our network, monitor network performance, resolve service issues, and install new sites. Cost of revenue excludes depreciation, amortization, and accretion, which is reported as a separate line item of operating costs. Cost of revenue was $122.9 million for the three months ended June 30, 2008, an increase of $9.1 million, or 8%, from $113.8 million for the three months ended June 30, 2007. This increase was primarily driven by an expanded cost base to support sales and revenue growth, including $2.4 million in personnel costs and $3.4 million in rent and utilities on new data centers. Cost of revenue, as a percentage of revenue, was 58% for the three months ended June 30, 2008 compared to 56% for the three months ended June 30, 2007.
Sales, General, and Administrative Expenses.Sales, general, and administrative expenses include sales and marketing salaries and related benefits; product management, pricing and support salaries and related benefits; sales commissions and referral payments; advertising, direct marketing and trade show costs; occupancy costs; executive, financial, legal, tax and administrative support personnel and related costs; professional services, including legal, accounting, tax and consulting services; and bad debt expense. It excludes depreciation, amortization, and accretion, which is reported as a separate line item of operating costs. Sales, general, and administrative expenses were $55.0 million for the three months ended June 30, 2008, an increase of $2.7 million, or 5%, from $52.3 million for the three months ended June 30, 2007, due primarily to increased personnel costs. Sales, general, and administrative expenses as a percentage of revenue were 26% for the three months ended June 30, 2008 and 2007.
Depreciation, Amortization, and Accretion.Depreciation, amortization, and accretion expense consists primarily of the depreciation of property and equipment, amortization of intangible assets, and accretion expense related to the aging of the discounted present value of certain liabilities and unfavorable long-term fixed price contracts assumed in acquisitions. Depreciation, amortization, and accretion was $34.2 million for the three months ended June 30, 2008, an increase of $11.4 million, or 50%, from $22.8 million for the three months ended June 30, 2007. This increase was due to the addition and expansion of data centers and other capital expenditures.
Net Interest Expense and Other.Net interest expense and other primarily represents interest on our long-term debt, our capital and financing method lease obligations, and certain other non-operating charges. Net interest expense and other was $8.1 million for the three months ended June 30, 2008, a decrease of $7.7 million, or 49%, from $15.8 million for the three months ended June 30, 2007. This decrease was largely due to the absence of interest on our Subordinated Notes, which were extinguished in June 2007. The following table presents a quarterly overview of the components of net interest expense and other (dollars in thousands):
Three Months Ended June 30, | |||||||||||||||
2008 | 2007 | Dollar Change | Percentage Change | ||||||||||||
Interest expense and other, net | |||||||||||||||
Interest expense | $ | 8,770 | $ | 20,297 | $ | (11,527 | ) | (57 | )% | ||||||
Interest income | (729 | ) | (4,968 | ) | 4,239 | 85 | % | ||||||||
Other (income) expense | 97 | 471 | (374 | ) | (79 | )% | |||||||||
Total interest expense and other, net | $ | 8,138 | $ | 15,800 | $ | (7,662 | ) | (48 | )% | ||||||
Income (Loss) before Income Taxes. Loss before income taxes for the three months ended June 30, 2008 was $7.3 million, a decline of $138.9 million, from income before income taxes of $131.6 million for the three months ended June 30, 2007. This decrease was primarily driven by the gain on sale of data center assets of $180.8 million, partially offset by the $45.1 million loss on debt extinguishment, along with other factors described above.
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Income Tax Expense.Income tax expense for the three months ended June 30, 2008 was $0.1 million compared to a $1.7 million benefit for the three months ended June 30, 2007. The $1.8 million increase was mainly due to the reduction in our expected 2007 annual effective tax rate recorded in the second quarter of 2007, resulting from the utilization of existing net operating losses, and the realization of the interest deductions resulting from the extinguishment of the Subordinated Notes, as compared to 2008 where no reduction in the expected tax rate was recorded. Additionally, certain minimum taxes will be payable in 2008 despite the pre-tax loss.
Net Income (Loss).Net loss for the three months ended June 30, 2008 was $7.4 million, a decline of $140.7 million, from net income of $133.3 million for the three months ended June 30, 2007, driven by the factors previously described.
Six Months Ended June 30, 2008 Compared to the Six Months Ended June 30, 2007
Executive Summary of Results of Operations
Revenue increased $10.4 million, or 3%, for the six months ended June 30, 2008, compared to the six months ended June 30, 2007, as a result of a 24% improvement in managed hosting, which was partially offset by declines in network services and the elimination of other services revenue. Income from operations declined $331.0 million, for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, which included the gain on the sales of CDN Assets of $125.2 million and the data center assets of $180.8 million. Excluding the gains, the decline in income from operations of $25.0 million was due primarily to the increase in depreciation and amortization expense of $21.5 million. Net loss before income taxes for the six months ended June 30, 2008, was $10.7 million. Excluding the gains on sales of assets and $45.1 million loss on debt extinguishment, net loss before income taxes was $8.7 million for the six months ended June 30, 2007, a decrease of $2.0 million.
Revenue.The following table presents revenue by major service category (dollars in thousands):
Six Months Ended June 30, | |||||||||||||
2008 | 2007 | Dollar Change | Percentage Change | ||||||||||
Revenue: | |||||||||||||
Colocation | $ | 142,670 | $ | 137,820 | $ | 4,850 | 4 | % | |||||
Managed hosting | 126,022 | 101,309 | 24,713 | 24 | % | ||||||||
Total hosting | 268,692 | 239,129 | 29,563 | 12 | % | ||||||||
Network services | 147,532 | 157,314 | (9,782 | ) | (6 | )% | |||||||
Other services | — | 9,359 | (9,359 | ) | (100 | )% | |||||||
Total revenue | $ | 416,224 | $ | 405,802 | $ | 10,422 | 3 | % | |||||
Revenue was $416.2 million for the six months ended June 30, 2008, an increase of $10.4 million, or 3%, from $405.8 million for the six months ended June 30, 2007. Hosting revenue was $268.7 million for the six months ended June 30, 2008 an increase of $29.6 million, or 12%, from $239.1 million for the six months ended June 30, 2007. The increase was due to $24.7 million in revenue growth in our managed hosting services, primarily utility computing and professional services, and a $4.9 million increase in colocation revenue that resulted from more favorable pricing in sales of reclaimed space and sales into new and expanded data centers, partially offset by an absence of revenue from data center assets sold in June 2007, which contributed $16.5 million in revenue during the prior year six month period. Network services revenue was $147.5 million for the six months ended June 30, 2008, a decrease of $9.8 million from $157.3 million for the six months ended June 30, 2007. The decrease was driven by declines in enterprise and wholesale bandwidth volumes and in managed IP VPN revenue. Other services revenue was eliminated in the second half of 2007, due to CDN customers migrating to Level 3 and Telerate completing its transition to Reuters’ products. Other services revenue contributed $9.4 million for the six months ended June 30, 2007.
Cost of Revenue.Cost of revenue was $241.5 million for the six months ended June 30, 2008, an increase of $11.1 million from $230.4 million for the six months ended June 30, 2007. Cost of revenue, as a percentage of revenue, was 58% for the six months ended June 30, 2008, compared to 57% for the six months ended June 30, 2007. This increase was primarily driven by an expanded cost base to support sales and revenue growth, including a $5.3 million increase in personnel costs and a $4.4 million increase in rent and utilities on new data centers.
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Sales, General, and Administrative Expenses.Sales, general, and administrative expenses were $108.4 million for the six months ended June 30, 2008, an increase of $2.9 million, or 3%, from $105.5 million for the six months ended June 30, 2007, primarily due to increased personnel costs. Sales, general, and administrative expenses as a percentage of revenue were 26% for the six months ended June 30, 2008 and June 30, 2007.
Depreciation, Amortization, and Accretion. Depreciation, amortization, and accretion was $65.9 million for the six months ended June 30, 2008, an increase of $21.5 million, or 48%, from $44.4 million for the six months ended June 30, 2007. This increase was due to the addition and expansion of data centers and other capital expenditures.
Gain on Sales of Assets. As previously described, the sale of our data center assets resulted in a gain of $180.8 million, after transaction fees and related costs and a working capital adjustment, and the sale of our CDN Assets resulted in a gain of $125.2 million, after transaction fees and related costs and a working capital adjustment, for the six months ended June 30, 2007.
Loss on Debt Extinguishment.As previously described, in connection with the extinguishment of our Subordinated Notes in June 2007, we incurred a charge of $45.1 million representing the payment of make-whole interest on the notes, and the write-off of the remaining original issue discount and related deferred financing costs.
Net Interest Expense and Other. Net interest expense and other was $11.1 million for the six months ended June 30, 2008, a decrease of $23.0 million, or 67%, from $34.1 million for the six months ended June 30, 2007. This decrease was largely due to the absence of interest on our Subordinated Notes, which were extinguished in June 2007. The following table presents a six month overview of the components of net interest expense and other (dollars in thousands):
Six Months Ended June 30, | |||||||||||||||
2008 | 2007 | Dollar Change | Percentage Change | ||||||||||||
Interest expense and other, net | |||||||||||||||
Interest expense | $ | 17,283 | $ | 39,600 | $ | (22,317 | ) | (56 | )% | ||||||
Interest income | (2,314 | ) | (7,619 | ) | 5,305 | 69 | % | ||||||||
Other (income) expense | (3,846 | ) | 2,156 | (6,002 | ) | (278 | )% | ||||||||
Total interest expense and other, net | $ | 11,123 | $ | 34,137 | $ | (23,014 | ) | (67 | )% | ||||||
Income (Loss) before Income Taxes. Loss before income taxes for the six months ended June 30, 2008, was $10.7 million, a decrease of $262.9 million, from income before income taxes of $252.2 million for the six months ended June 30, 2007, primarily driven by the factors previously described.
Income Tax Expense. Income taxes for the six months ended June 30, 2008 were $0.9 million compared to $4.4 million for the six months ended June 30, 2007. This decrease is primarily due to minimum taxes being recorded in 2007 on a larger tax base than the corresponding minimum tax base in 2008. The reduction in the tax base resulted from less book income being recorded during 2008. Additionally certain minimum taxes will be payable in 2008 despite the pre-tax loss.
Net Income (Loss). Net loss for the six months ended June 30, 2008, was $11.6 million, a decrease of $259.4 million from a net income of $247.8 million for the six months ended June 30, 2007, primarily driven by the factors previously described.
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LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2008, our cash and cash equivalents balance was $118.2 million. We had $53.4 million in net cash provided by operating activities during the six months ended June 30, 2008, a decrease of $2.9 million from net cash provided by operating activities of $56.3 million for the six months ended June 30, 2007. This change was due to the $5.2 million Convertible Notes interest payment made in 2008, partially offset by overall improvements in our operating results, largely resulting from continued operational efficiencies and cost-savings initiatives. Net cash used in investing activities for the six months ended June 30, 2008 was $140.4 million, a decrease of $297.8 million from net cash provided by investing activities of $157.4 million for the six months ended June 30, 2007. This change was primarily related to the absence of proceeds received for our sales of data center and CDN Assets in 2007 for net proceeds of $318.5 million, partially offset by a decrease in capital expenditures of $21.5 million. Net cash provided by financing activities for the six months ended June 30, 2008 was $26.2 million, an increase of $30.0 million from net cash used in financing activities of $3.8 million for the six months ended June 30, 2007. This increase primarily relates to $33.3 million in proceeds from the Lombard financing, offset by a $7.9 million decrease in payments to satisfy employee statutory tax withholdings that arose in connection with vesting equity awards.
We believe we have sufficient cash to fund business operations and capital expenditures for at least twelve months from the date of this filing, from cash on hand, operations, and available debt capacity. We may supplement this near-term liquidity with credit facilities and equity or debt financings if favorable financing terms are made available to us. Due to the dynamic nature of our industry and unforeseen circumstances, if we are unable to fully fund cash requirements through operations or available debt capacity, we will need to obtain additional financing through a combination of equity and debt financings, renegotiation of terms on our existing debt, and sales of assets. If any such activities become necessary, there can be no assurance that we would be successful in completing any of these activities on terms that would be favorable to us. As of June 30, 2008, unused availability under our $85.0 million Revolving Facility was $74.0 million, which reflects $11.0 million of outstanding letters of credit, pledged as collateral to support certain facility leases and utility agreements.
The following table presents a quarterly overview of our cash flows for the periods indicated (dollars in thousands):
Three Months Ended | ||||||||||||||||||||
June 30, 2008 | March 31, 2008 | December 31, 2007 | September 30, 2007 | June 30, 2007 | ||||||||||||||||
Net cash provided by operating activities | $ | 21,431 | $ | 31,984 | $ | 27,106 | $ | 33,924 | $ | 28,028 | ||||||||||
Net cash provided by (used in) investing activities(1) | (97,107 | ) | (43,293 | ) | (100,399 | ) | (86,386 | ) | 64,537 | |||||||||||
Net cash provided by (used in) financing activities(2) | 29,633 | (3,409 | ) | (278 | ) | 132 | (4,393 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | (46,433 | ) | (18,499 | ) | (73,799 | ) | (52,063 | ) | 87,429 |
(1) | Includes net proceeds of $190.2 million from the sale of certain data center assets during the three months ended June 30, 2007. Includes $225.8 million spent in 2007 for the development of four data centers opened in 2007 and six data centers expected to open in 2008. |
(2) | Includes proceeds of $345.0 million from Convertible Notes offering and payments of $342.5 million related to the extinguishment of our Subordinated Notes during the three months ended June 30, 2007. |
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Discussion of Changes in Liquidity and Capital Resources
Long-term Debt and Other Financing
The following table sets forth our long-term debt and other financing as of June 30, 2008 and December 31, 2007 (dollars in thousands):
June 30, 2008 | December 31, 2007 | |||||
Convertible Notes | $ | 345,000 | $ | 345,000 | ||
Other financing(1) | 30,695 | 8,362 | ||||
Lombard loan facility | 33,287 | — | ||||
Revolving credit facility | — | — | ||||
Capital and financing method lease obligations(2) | 172,170 | 166,482 | ||||
Total long-term debt and other financing | $ | 581,152 | $ | 519,844 | ||
(1) | Other financing includes borrowings under our Cisco loan agreement, for which the weighted-average interest rate was 6.50% as of June 30, 2008 and December 31, 2007. The amount presented in the table above includes the current amounts due of $6.6 million and $1.8 million as of June 30, 2008 and December 31, 2007, respectively. Payments on the loan are made monthly. |
(2) | Capital and financing method lease obligations include capital and financing method leases on certain of our facilities and equipment held under capital leases. The weighted-average interest rates for such leases were 12.36% as of June 30, 2008 and 12.70% as of December 31, 2007. The amounts presented in the table above include the current amounts due of $6.0 million as of June 30, 2008 and $4.4 million as of December 31, 2007, respectively. |
Convertible Notes
In May 2007, we issued $345.0 million aggregate principal amount of 3.0% Convertible Senior Notes due May 15, 2012, or the Convertible Notes. Interest is payable semi-annually on May 15 and November 15 of each year, commencing November 15, 2007.
The Convertible Notes are governed by an Indenture dated May 9, 2007, between us, as issuer, and The Bank of New York, as trustee, or the Indenture. The Indenture does not contain any financial covenants or restrictions on the payment of dividends, the incurrence of senior debt or other indebtedness, or the issuance or repurchase of securities by us. The Convertible Notes are unsecured and are effectively subordinated to our existing or future secured debts to the extent of the assets securing such debt.
Upon conversion, holders will receive, at our election, cash, shares of our common stock, or a combination thereof. However, we may at any time irrevocably elect for the remaining term of the Convertible Notes to satisfy its conversion obligation in cash up to 100% of the principal amount of the Convertible Notes converted, with any remaining amount to be satisfied, at our election, in cash, shares of our common stock, or a combination thereof.
The initial conversion rate is 14.2086 shares of common stock per $1,000 principal amount of Convertible Notes, subject to adjustment. This represents an initial conversion price of approximately $70.38 per share of common stock. Holders of the Notes may convert their Convertible Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, due to the conversion formulas associated with the Convertible Notes, if our stock is trading at levels exceeding the conversion price per share of common stock, and if we elect to settle the obligation in cash, additional consideration beyond the $345.0 million of gross proceeds received would be required.
We have determined that the Convertible Notes contain an embedded derivative requiring bifurcation and separate accounting treatment. Such derivative had a de minimis fair value as of June 30, 2008 and as a result, we have not recorded any related amounts in the condensed consolidated financial statements. We will remeasure this embedded derivative each reporting period, as applicable, and changes in fair value will be reported in the consolidated statement of operations. We have concluded that the contingently issuable shares are dilutive for diluted net income (loss) per common share calculations using the “if-converted” method.
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In connection with the issuance of the Convertible Notes, debt issuance costs totaling $8.9 million were deferred and are being amortized to interest expense through the maturity date of the Convertible Notes, May 15, 2012. Debt issuance costs related to the Convertible Notes, net of accumulated amortization, were $7.0 million as of June 30, 2008.
Subordinated Notes
In June 2007, we completed the early extinguishment of our Subordinated Notes by making cash payments totaling $342.5 million to the respective note holders. Such payments included the original principal of $200.0 million, paid-in-kind and make-whole interest of $147.6 million, and an early extinguishment premium of $3.5 million, offset by a negotiated discount to the original contractual extinguishment provisions of $8.6 million. In connection with the extinguishment, we wrote-off the remaining unamortized original issue discount of $23.8 million and the remaining unamortized issuance costs of $0.5 million, and recorded a loss on extinguishment of $45.1 million in June 2007.
Credit Facilities
Revolving Facility. We maintain an $85.0 million revolving credit facility, or the Revolving Facility, which includes a $20.0 million letter of credit provision. The Revolving Facility may be used for working capital and other general corporate purposes. The Revolving Facility matures and all outstanding borrowings and unpaid interest are due on December 9, 2008. On or before the maturity date, we expect to renew the Revolving Facility with an agreements similar in terms. In addition, all outstanding borrowings are subject to mandatory prepayment upon certain events, including the availability of less than $7.0 million in borrowing capacity and qualified cash balances, as defined by the Revolving Facility agreement. The Revolving Facility is secured by substantially all of our domestic properties and assets and we may terminate the Revolving Facility prior to maturity. As of June 30, 2008, we had no outstanding principal amounts under the Revolving Facility, but had outstanding letters of credit of $11.0 million and unused availability of $74.0 million. Unused commitments on the Revolving Facility are subject to a 0.5% annual commitment fee.
Loan Agreement and Lease Facility.We maintain a loan and security agreement, or the Loan Agreement, and a master lease agreement, or the Lease Agreement, with Cisco Systems Capital Corporation. The Loan Agreement provides for borrowings of up to $33.0 million, at an annual interest rate of 6.50%, to purchase network equipment. The Lease Agreement provides a lease facility (the Lease Facility) to lease equipment with borrowings up to $10.0 million, at an annual interest rate based on two-year U.S. Treasury Notes. We also have commitments for the availability of an additional $10.0 million in borrowings. The effective interest rate on current outstanding borrowings ranges from 5.52% to 7.25%. We may utilize up to $3.0 million of the Lease Facility for third party manufactured equipment. The obligations under the Loan Agreement are secured by a first-priority security interest in the equipment purchased with the proceeds from the loan. As of June 30, 2008, we had $33.0 million in borrowings under the Loan Agreement and $17.9 million under the Lease Facility.
Lombard Loan Agreement. In June 2008, one of our subsidiaries, SAVVIS UK Ltd., entered into a loan agreement (the UK Loan Agreement) with Lombard North Central Plc. The UK Loan Agreement provides for borrowings of up to £35.0 million to be used in connection with the construction and development of a new data center in the United Kingdom. The UK Loan Agreement allows for advances from the lender to finance certain payments due to the contractor and others during the construction period. The UK Loan Agreement has a five-year term and requires quarterly installments of interest only for the first two years and quarterly installments of principal and interest for the remainder of the term. We may elect to pay interest from the construction completion date, anticipated to be in October 2008, at a rate equal to the one or three month GBP Libor plus 2.80% for 12 month periods, or we may elect to fix the interest rate at the available lender swap rate plus 2.80% for a minimum of three years up to the remaining loan period or such shorter six month increments. We are also required to enter into a hedge agreement to provide interest rate protection if GBP Libor equals or exceeds 8.0%. We have guaranteed the obligations of SAVVIS UK under the UK Loan Agreement and the obligations are secured by a first priority security interest in substantially all of SAVVIS UK’s current data center assets and certain future assets which will be located in the new data center. In addition, we are required to maintain a letter of credit ranging from £7.0 million to £14.0 million for a minimum of two years from the construction completion date. We may prepay the UK Loan, in whole or in part, without prepayment penalty, subject to certain breakage fees, if any. As of June 30, 2008, outstanding borrowings under the UK Loan Agreement totaled £16.9 million, or approximately $33.3 million using the effective exchange rate of 1.9663 on June 26, 2008, and the effective interest rate was 8.30%.
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Debt Covenants
The provisions of our debt agreements contain a number of covenants including, but not limited to, maintaining certain financial conditions, restricting or limiting our ability to incur more debt, pay dividends, and repurchase stock (subject to financial measures and other conditions). The ability to comply with these provisions may be affected by events beyond our control. The breach of any of these covenants could result in a default under our debt agreements and could trigger acceleration of repayment. As of and during the three and six months ended June 30, 2008, we were in compliance with all applicable covenants under the debt agreements.
Future Principal Payments
As of June 30, 2008, aggregate future principal payments of long-term debt were $3.3 million for the remainder of the year ended December 31, 2008, $6.6 million for the year ended December 31, 2009, $10.2 million for the year ended December 31, 2010, $24.3 million for the year ended December 31, 2011, $378.1 million for the year ended December 31, 2012, and $22.0 million for the year ended December 31, 2013. The weighted-average interest rate applicable to outstanding borrowings was 3.7% and 3.1% as of June 30, 2008 and December 31, 2007, respectively.
Commitments and Contingencies
Our customer contracts generally span multiple periods, which results in us entering into arrangements with various suppliers of communications services that require us to maintain minimum spending levels, some of which increase over time, to secure favorable pricing terms. Our remaining aggregate minimum spending levels, allocated ratably over the terms of such contracts, are $36.2 million, $45.0 million, $34.5 million, $19.4 million, $13.6 million, and $69.8 million during the years ended December 31, 2008, 2009, 2010, 2011, 2012, and thereafter, respectively. Should we not meet the minimum spending levels in any given term, decreasing termination liabilities, representing a percentage of the remaining contractual amounts, may become immediately due and payable. Furthermore, certain of these termination liabilities are potentially subject to reduction should we experience the loss of a major customer or suffer a loss of revenue from a general economic downturn. Before considering the effects of any potential reductions for the business downturn provisions, if we had terminated all of these agreements as of June 30, 2008, the maximum liability would have been $218.5 million. To mitigate this exposure, when possible, we align our minimum spending commitments with customer revenue commitments for related services.
We are subject to various legal proceedings and actions arising in the normal course of our business. While the results of all such proceedings and actions cannot be predicted, management believes, based on facts known to management today, that the ultimate outcome of all such proceedings and actions will not have a material adverse effect on our consolidated financial position, results of operation, or cash flows. Refer to Note 9 of our Unaudited Condensed Consolidated Financial Statements.
We have employment agreements with key executive officers that contain provisions with regard to base salary, bonus, equity-based compensation, and other employee benefits. These agreements also provide for severance benefits in the event of employment termination or a change in control.
Off-Balance-Sheet Arrangements
As of June 30, 2008, we did not have any significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K. In the normal course of business, we are a party to certain guarantees and financial instruments with off-balance sheet risk as they are not reflected in our consolidated balance sheets, such as letters of credit, indemnifications, and operating leases, under which the majority of our facilities are leased. The agreements associated with such guarantees and financial instruments mature at various dates through December 2022, and may be renewed as circumstances warrant. Our financial instruments are valued based on the estimated amount of exposure and the likelihood of performance being required. Based on our past experience, no claims have been made against these financial instruments nor do we expect the exposure to material losses resulting therefrom to be anything other than remote. As a result, we determined such financial instruments did not have significant value and have not recorded any related amounts in our consolidated financial statements. As of June 30, 2008, we had $11.0 million in letters of credit outstanding under the Revolving Facility, pledged as collateral to support certain facility leases and utility agreements. Also, in connection with the sale of our CDN Assets, we agreed to indemnify the purchaser should it incur certain losses due to a breach of our representations and warranties.
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CRITICAL ACCOUNTING ESTIMATES
Revenue Recognition
We derive the majority of our revenue from recurring revenue streams, consisting primarily of hosting services, which includes managed hosting and colocation, and network services. We recognize revenue from those services as they are provided. Installation fees, although generally billed upon installation, are deferred and recognized ratably over the life of the customer contract. Revenue is recognized when the related service has been provided, there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection is reasonably assured.
In addition, we have service level commitments pursuant to individual customer contracts with a majority of our customers. To the extent that such service levels are not achieved, or are otherwise disputed due to performance or service issues, unfavorable weather, or other service interruptions or conditions, we estimate the amount of credits to be issued and record a reduction to revenue, with a corresponding increase in the allowance for credits and uncollectibles. In the event that we provide credits or payments to customers related to service level claims, we may request recovery of such costs through third party insurance agreements. Insurance proceeds received under these agreements are recorded as an offset to previously recorded revenue reductions.
Allowance for Credits and Uncollectibles
As previously described, we have service level commitments with certain of our customers. To the extent that such service levels are not achieved, we estimate the amount of credits to be issued, based on historical credits issued and known disputes, and record a reduction to revenue, with a corresponding increase in the allowance for credits and uncollectibles.
We assess collectibility of accounts receivable based on a number of factors, including customer payment history and creditworthiness. We generally do not request collateral from our customers although in certain cases we may obtain a security deposit. We maintain an allowance for uncollectibles when evaluating the adequacy of allowances, and we specifically analyze accounts receivable, current economic conditions and trends, historical bad debt write-offs, customer concentrations, customer payment history and creditworthiness, and changes in customer payment terms. Delinquent account balances are charged to expense after we have determined that the likelihood of collection is not probable.
Equity-Based Compensation
We recognize equity-based compensation in accordance with Statement of Financial Accounting Standards (SFAS) 123(R), “Share-Based Payment.” The fair value of total equity-based compensation for stock options and restricted preferred units is calculated using the Black-Scholes option pricing model, which utilizes certain assumptions and estimates that have a material impact on the amount of total compensation cost recognized in our consolidated financial statements. Total equity-based compensation costs for restricted stock units and restricted stock awards are calculated based on the market value of our common stock on the date of grant. Total equity-based compensation is amortized to non-cash equity-based compensation expense over the vesting or performance period of the award, as applicable, which typically ranges from three to four years.
Other Critical Accounting Policies
While all of the significant accounting policies described in the notes to the unaudited condensed consolidated financial statements contained elsewhere herein are important, some of these policies may be viewed as being critical. Such policies are those that are most important to the portrayal of our financial condition and require our most difficult, subjective or complex estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We base our estimates and assumptions on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ from these estimates and assumptions. For further information regarding the application of these and other accounting policies, see Note 2 of Notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report and Part II, Item 7 of our 2007 Annual Report on Form 10-K.
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RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R) amends SFAS 141 and provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed, and any noncontrolling interest in an acquiree. It also provides disclosure requirements to enable users of financial statements to evaluate the nature and financial effects of a business combination. It is effective for fiscal years beginning on or after December 15, 2008 and will be applied prospectively to any future acquisitions. We do not believe the adoption of SFAS 141(R) will have a material effect on our consolidated financial position, results of operations, or cash flows.
In March 2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities.” SFAS 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. This includes qualitative disclosures about objectives for using derivatives by primary risk exposure and by purpose or strategy; information about the volume of the derivative activity; tabular disclosure of the financial statement location and amounts of the gains and losses related to the derivatives; and disclosures about credit-risk related contingent features in derivative agreements. It is effective for fiscal years beginning on or after November 15, 2008, with early adoption encouraged. We do not believe the adoption of SFAS 161 will have a material effect on our consolidated financial position, results of operations, or cash flows.
In May 2008, the FASB issued Staff Position APB 14-a, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement).” This FSP changes the accounting for our Convertible Notes. Under the new rules, for convertible debt instruments that may be settled entirely or partially in cash upon conversion, an entity should separately account for the liability and equity components of the instruments to reflect the issuer’s economic interest cost. This will require the reclassification of approximately $65 million from long-term debt to additional paid-in capital, which will be treated as original issue discount of the Convertible Notes. Higher interest expense will result by recognizing the accretion of the discounted carrying value of the Convertible Notes to their face amount as interest expense over the term of the Convertible Notes. The FSP is effective for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years, and requires retrospective application to all periods presented. While the FSP does not change the economic substance or cash flow requirements of the Convertible Notes, our interest expense will increase by approximately $13 million per year.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Interest Rate Risk
As of June 30, 2008, we had approximately $33.3 million (using an effective exchange rate as of June 26, 2008) outstanding variable rate debt under the UK Loan Agreement with Lombard North Central Plc. The interest rate payable under the UK Loan Agreement during the construction period is one month GBP Libor plus 2.80%, and upon completion, we can elect either one or three month GBP Libor plus 2.80% for 12 month periods, or we may elect to fix the interest rate at the available lender swap rate plus 2.80% for a minimum of three years up to the remaining loan period or such shorter six month increments. We are also required to enter into a hedge agreement to provide interest rate protection if GBP Libor equals or exceeds 8.0%. The remainder of our outstanding debt was fixed rate debt and was comprised of $345.0 million outstanding for the Convertible Notes, which bear interest at 3% per annum and $30.7 million outstanding for the Loan Agreement with Cisco Systems Capital Corporation, which provides for borrowings of up to $33.0 million, at an annual interest rate of 6.50%, to purchase network equipment.
There have been no material changes in our assessment of market risk sensitivity since our presentation of “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2007.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures
We conducted an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange Act)) as of the end of the period covered by this report. Based on management’s evaluation as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in U.S. Securities and Exchange Commission rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There has been no change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) during the period covered by this report that materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting.
PART II. | OTHER INFORMATION |
ITEM 1. | LEGAL PROCEEDINGS. |
We are subject to various legal proceedings and actions arising in the normal course of our business. While the results of all such proceedings and actions cannot be predicted, management believes, based on facts known to management today, that the ultimate outcome of all such proceedings and actions will not have a material adverse affect on our consolidated financial position, results of operation, or cash flows.
One such action in which we are the defendant is an action brought by SiteLite Holdings, Inc., SiteLite, in the Superior Court of California, County of Orange. SiteLite alleges several business torts and statutory violations related to a contractual relationship with us that we terminated in 2005, including defamation and false advertising, theft of intellectual property and trade secrets, and breach of contract. We have agreed to settle all claims made by SiteLite for an immaterial amount. A hearing to consider the dismissal of the matter is scheduled for August.
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ITEM 1A. | RISK FACTORS. |
You should carefully consider the risks described below in addition to all other information provided to you in this document. Any of the following risks could materially and adversely affect our business, results of operations and financial condition. The risks and uncertainties described below are those that we currently believe may materially affect our company. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect our company.
The description of our risk factors below includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2007.
Risks Related to Our Business
Our operating results may fluctuate significantly, which makes our future results difficult to predict and may cause our operating results to fall below expectations.
Although we recognized net income of $250.6 million for the year ended December 31, 2007, we incurred a net loss of $11.6 million for the six months ended June 30, 2008, a net loss of $44.0 million for the year ended December 31, 2006, and a net loss of $69.1 million in the year ended December 31, 2005 and we may incur net losses in the future. We may also have fluctuations in revenues, expenses and losses due to a number of factors, many of which are beyond our control, including the following:
• | demand for and market acceptance of our hosting and network products; |
• | increasing sales, marketing, and other operating expenses; |
• | our ability to retain key employees that maintain relationships with our customers; |
• | the duration of the sales cycle for our services; |
• | changes in customers’ budgets for information technology purchases and in the timing of their purchasing decisions; |
• | the announcement or introduction of new or enhanced services by our competitors; |
• | acquisitions and dispositions we may make; |
• | our ability to implement internal systems for reporting, order processing, purchasing, billing and general accounting, among other functions, including our ability to implement an information technology system provided by SAP AG; |
• | our ability to meet performance standards under our agreements with our customers; |
• | changes in the prices we pay for utilities, local access connections, Internet connectivity, and longhaul backbone connections; |
• | the timing and magnitude of capital expenditures, including costs relating to the expansion of operations, and of the replacement or upgrade of our network and hosting infrastructure; and |
• | unfavorable changes in general economic conditions in the U.S. or other countries in which we do business. |
Accordingly, our results of operations for any period may not be comparable to the results of operations for any other period and should not be relied upon as indications of future performance.
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Our failure to meet performance standards under our agreements could result in our customers terminating their relationships with us or our customers being entitled to receive financial compensation, which could lead to reduced revenues.
Our agreements with our customers contain various guarantees regarding our performance and our levels of service. If we fail to provide the levels of service or performance required by our agreements, our customers may be able to receive service credits for their accounts and other financial compensation, as well as terminate their relationship with us. In addition, any inability to meet our service level commitments or other performance standards could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results.
We depend on a number of third-party providers, and the loss of, or problems with, one or more of these providers may impede our growth or cause us to lose customers.
We are dependent on third-party providers to supply products and services. For example, we lease equipment from equipment providers, bandwidth capacity from telecommunications network providers in the quantities and quality we require, and data center space from third party landlords. While we have entered into various agreements for equipment, carrier line capacity, and data center space, any failure to obtain equipment, additional capacity, or space, if required, would impede the growth of our business and cause our financial results to suffer. In addition, our customers that use the equipment and facilities we lease or the services of these telecommunication providers may in the future experience difficulties due to failures unrelated to our systems. If, for any reason, these providers fail to provide the required services to our customers or suffer other failures, we may incur financial losses and our customers may lose confidence in our company, and we may not be able to retain these customers.
Our indebtedness could limit our ability to operate our business successfully.
As of June 30, 2008, the total principal amount of our debt, including capital and financing method lease obligations was $581.2 million. In addition, we expect from time to time to continue to incur additional indebtedness and other liabilities in the future. If we incur additional indebtedness or if we use more cash than we generate in the future, then the possibility that we may not have cash sufficient to pay, when due, the outstanding amount of our indebtedness will increase. If we do not have sufficient cash available to repay our debt obligations when they mature, we will have to refinance such obligations or we would be in default under the terms of our debt obligations, and there can be no assurance that we will be successful in such refinancing or that the terms of any refinancing will be acceptable to us. This also means that we will need to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, reducing the funds available for operations, working capital, capital expenditures, sales and marketing initiatives, acquisitions, and general corporate or other purposes.
We may not be able to secure additional financing on favorable terms to meet our future capital needs.
If we do not have sufficient cash flow from our operations, we may need to raise additional funds through equity or debt financings in the future in order to meet our operating and capital needs. We may not be able to secure additional debt or equity financing on favorable terms, or at all, at the time when we need such funding. If we are unable to raise additional funds, we may not be able to pursue our growth strategy and our business could suffer. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. In addition, any debt financing that we may secure in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, if we decide to raise funds through debt or convertible debt financings, we may be unable to meet our interest or principal payments.
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We may make acquisitions or enter into joint ventures or strategic alliances, each of which is accompanied by inherent risks.
If appropriate opportunities present themselves, we may make acquisitions or investments or enter into joint ventures or strategic alliances with other companies. Risks commonly encountered in such transactions include:
• | the difficulty of assimilating the operations and personnel of the combined companies; |
• | the risk that we may not be able to integrate the acquired services, products, or technologies with our current services, products, and technologies; |
• | the potential disruption of our ongoing business; |
• | the diversion of management attention from our existing business; |
• | the inability to retain key technical and managerial personnel; |
• | the inability of management to maximize our financial and strategic position through the successful integration of acquired businesses; |
• | difficulty in maintaining controls, procedures, and policies; |
• | the impairment of relationships with employees, suppliers, and customers as a result of any integration; |
• | the loss of an acquired base of customers and accompanying revenue; |
• | the assumption of leased facilities or other long-term commitments, or the assumptions of unknown liabilities, that could have a material adverse impact on our profitability and cash flow; and |
• | possible dilution to our stockholders. |
As a result of these potential problems and risks, businesses that we may acquire or invest in may not produce the revenue, earnings, or business synergies that we anticipated. In addition, we cannot assure that any potential transaction will be successfully identified and completed or that, if completed, the acquired businesses or investment will generate sufficient revenue to offset the associated costs or other potential harmful effects on our business.
A material reduction in revenue from our largest customer or the loss of other key customers could harm our financial results to the extent not offset by cost reductions or additional revenue from new or other existing customers.
Reuters accounted for $87.6 million, or 11%, of our revenue in 2006 and $58.0 million, or 7%, of our revenue in 2007, and $29.7 million, or 7%, of our revenue for the first six months of 2007 compared to $29.4 million, or 7%, of our revenue in the first six months of 2008. The loss of Reuters or any of our other key customers, or a considerable reduction in the amount of our services that these customers purchase, could materially reduce our revenues which, to the extent not offset by cost reductions or revenue from new or other existing customers, could materially reduce our cash flows and financial position. This may limit our ability to raise capital or fund our operations, working capital needs, and capital expenditures in the future.
Our operations could be adversely affected if we are unable to maintain peering arrangements with Internet Service Providers on favorable terms.
We enter into peering agreements with Internet Service Providers throughout our market which allow us to access the Internet and exchange traffic transparently with these providers. Previously, many providers agreed to exchange traffic without charging each other. Recently, however, many providers that previously offered peering transparency have reduced peering relationships or are seeking to impose charges for transit, especially for unbalanced traffic offered and received by us with these peering partners. For example, several network operators with large numbers of individual users claim that they should be able to charge network operators and businesses that send traffic to those users. Increases in costs associated with Internet and exchange traffic could have an adverse effect on our business. If we are not able to maintain our peering relationships on favorable terms, we may not be able to provide our customers with affordable services, which would adversely affect our results from operations.
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We may be liable for the material that content providers distribute over our network.
The law relating to the liability of private network operators for information carried on, stored, or disseminated through their networks is still unsettled. We may become subject to legal claims relating to the content disseminated on our network. For example, lawsuits may be brought against us claiming that material on our network on which someone relied was inaccurate. Claims could also involve matters such as defamation, invasion of privacy, and copyright infringement. In addition, there are other issues such as online gambling where the legal issues remain uncertain. If we need to take costly measures to reduce our exposure to these risks, or are required to defend ourselves against such claims, our financial results could be negatively affected.
Failures in our products or services, including our network and colocation services, could disrupt our ability to provide services, increase our capital costs, result in a loss of customers, or otherwise negatively affect our business.
Our ability to implement our business plan successfully depends upon our ability to provide high quality, reliable services. Interruptions in our ability to provide our services to our customers or failures in our products or services, through the occurrence of a natural disaster, human error, extreme temperature, or other unanticipated problem, could adversely affect our business and reputation. For example, problems at one or more of our data center facilities could result in service interruptions or failures or could cause significant equipment damage. In addition, our network could be subject to unauthorized access, computer viruses, and other disruptive problems caused by customers, employees, or others. Unauthorized access, computer viruses, or other disruptive problems could lead to interruptions, delays, or cessation of service to our customers. In addition, we may be unable to implement disaster recovery or security measures in a timely manner or, if and when implemented, these measures may not be sufficient or could be circumvented through the reoccurrence of a natural disaster or other unanticipated problem, or as a result of accidental or intentional actions. Resolving network failures or alleviating security problems may also require interruptions, delays, or cessation of service to our customers. Accordingly, failures in our products and services, including problems at our data centers, network interruptions, or breaches of security on our network may result in significant liability, a loss of customers, and damage to our reputation.
Our operations may be harmed and we could be subject to regulatory penalties and litigation if our network security is breached by unauthorized third parties.
If unauthorized third parties breach the security measures on our network, we could be subject to liability and could face reduced customer confidence in our services. Unauthorized access could also potentially jeopardize the security of confidential information of our customers or our customers’ end-users, which might expose us to liability from customers and the government agencies that regulate us, as well as deter potential customers from purchasing our services. Any internal or external breach in our network could severely harm our business and result in costly litigation and potential liability for us. Although we attempt to limit these risks contractually, there can be no assurance that we will limit the risk and not incur financial penalties. To the extent our customers demand that we accept unlimited liability and to the extent there is a competitive trend to accept it, such a trend could affect our ability to retain these limitations in our contracts at the risk of losing the business.
Increased energy costs, power outages, and limited availability of electrical resources may adversely affect our operating results.
Our data centers are susceptible to regional costs and supply of power and electrical power outages. 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. In addition, our energy costs have recently increased and may continue to increase for a variety of reasons including increased pressure on legislators to pass green legislation. As energy costs increase, we may not always be able to pass on the increased costs of energy to our customers, which could harm our business. Power and cooling requirements at our data centers are also increasing as a result of the increasing power demands of today’s servers. Since we rely on third parties to provide our data centers with power sufficient to meet our customers’ power needs, and we generally do not control the amount of power drawn by our customers, our data centers could have a limited or inadequate amount of electrical resources. Our customer’s demand for power may also exceed the power capacity in our older data centers, which may limit our ability to fully utilize these data centers. This could adversely affect our relationships with our customers and hinder our ability to run our data centers, which could harm our business.
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If we are unable to recruit or retain qualified personnel, our business could be harmed.
We must continue to identify, hire, train, and retain IT professionals, technical engineers, operations employees, and sales and senior management personnel who maintain relationships with our customers and who can provide the technical, strategic, and marketing skills required for our company to grow. There is a shortage of qualified personnel in these fields, and we compete with other companies for the limited pool of these personnel. The failure to recruit and retain necessary technical, managerial, sales, and marketing personnel could harm our business and our ability to grow our company.
Our failure to implement our growth strategy successfully could harm our business.
Our growth strategy includes increasing revenue from our colocation and managed hosting services. Increasing revenue from our colocation and managed hosting services depends on our ability to raise prices to existing customers to market rates or replace them with higher paying customers. In addition, we have plans to develop and have developed new data centers as part of our growth strategy. If there are any significant unplanned delays in developing these data centers, the cost of development exceeds our projections, or we do not have sufficient customer demand in the markets to support the new data centers once they are built, our financial results may be harmed. There is no assurance that we will be able to implement these initiatives in a timely or cost effective manner, and this failure to implement our growth strategy could cause our operations and financial results to be negatively affected.
We may not be able to protect our intellectual property rights.
We rely upon a combination of internal and external nondisclosure safeguards including confidentiality agreements, as well as trade secret laws to protect our proprietary rights. We cannot, however, assure that the steps taken by us in this regard will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are subject to the risk of litigation alleging infringement of third-party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property, or acquire licenses to the intellectual property that is the subject of the alleged infringement.
We have agreed to certain indemnification obligations which, if we are required to perform, may negatively affect our operations.
In connection with our sale of the assets related to our content delivery network, we agreed to indemnify the purchaser for certain losses that it may incur due to a breach of our representations and warranties. If we are required to perform such obligations should they arise, this may harm our operations and prevent us from being able to engage in favorable business activities, consummate strategic acquisitions or otherwise fund capital needs.
Difficulties presented by international economic, political, legal, accounting, and business factors could harm our business in international markets.
For the six months ended June 30, 2008, 16% of our total revenue was generated in countries outside of the United States. Some risks inherent in conducting business internationally include:
• | unexpected changes in regulatory, tax, and political environments; |
• | longer payment cycles and problems collecting accounts receivable; |
• | fluctuations in currency exchange rates; |
• | our ability to secure and maintain the necessary physical and telecommunications infrastructure; |
• | challenges in staffing and managing foreign operations; and |
• | more restrictive laws or regulations, or more restrictive interpretations of existing laws or regulations, such as those related to content distributed over the Internet. |
Any one or more of these factors could adversely affect our business.
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Our inability to renew our data center leases on favorable terms could have a negative impact on our financial results.
All of our data centers are leased and have lease terms that expire between 2008 and 2022. The majority of these leases provide us with the opportunity to renew the lease at our option for periods generally ranging from five to ten years. Many of these options however, if renewed, provide that rent for the renewal period will be equal to the fair market rental rate at the time of renewal. If the fair market rental rates are significantly higher than our current rental rates, we may be unable to offset these costs by charging more for our services, which could have a negative impact on our financial results.
Our investment portfolio is subject to market fluctuations which may affect our liquidity.
Historically, we have invested in AAA rated U.S. government agencies, AAA rated money market funds meeting certain criteria, and A1/P1 rated commercial paper. The market value of these investments may decline due to general credit, liquidity, market, interest rate, and issuer default risks, which may be directly or indirectly affected by the U.S. sub-prime mortgage defaults that have affected various sectors of the financial markets causing credit and liquidity issues. Although we have not experienced any losses on our cash, cash equivalents, and short-term investments, declines in the market values of these investments in the future could have an adverse impact on our financial condition and operating results.
Risks Related to Our Industry
The markets for our hosting, network and professional services are highly competitive, and we may not be able to compete effectively.
The markets for our hosting, network, and professional services are extremely competitive. We expect that competition will intensify in the future, and we may not have the financial resources, technical expertise, sales, and marketing abilities or support capabilities to compete successfully in these markets. Many of our current and potential competitors have longer operating histories, greater name recognition, access to larger customer bases and greater market presence, lower costs of capital, engineering and marketing capabilities and financial, technological, and personnel resources than we do. As a result, as compared to us, our competitors may:
• | develop and expand their networking infrastructures and service offerings more efficiently or more quickly; |
• | adapt more rapidly to new or emerging technologies and changes in customer requirements; |
• | take advantage of acquisitions and other opportunities more effectively; |
• | develop products and services that are superior to ours or have greater market acceptance; |
• | adopt more aggressive pricing policies and devote greater resources to the promotion, marketing, sale, research, and development of their products and services; |
• | make more attractive price and performance offers to our existing and potential employees; |
• | establish cooperative relationships with each other or with third parties; and |
• | take advantage of existing relationships with customers more effectively or exploit their more widely recognized brand name to market and sell their services. |
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Our failure to achieve desired price levels could affect our ability to achieve profitability or positive cash flow.
We have experienced and expect to continue to experience pricing pressure for some of the services that we offer. Prices for Internet services have decreased in recent years and may decline in the future. In addition, by bundling their services and reducing the overall cost of their services, telecommunications companies that compete with us may be able to provide customers with reduced communications costs in connection with their hosting, data networking, or Internet access services, thereby significantly increasing pricing pressure on us. We may not be able to offset the effects of any such price reductions even with an increase in the number of our customers, higher revenues from enhanced services, cost reductions, or otherwise. In addition, we believe that the data networking and VPNs and Internet access and hosting industries are likely to continue to encounter consolidation which could result in greater efficiencies in the future. Increased price competition or consolidation in these markets could result in erosion of our revenues and operating margins and could have a negative impact on our profitability. Furthermore, larger consolidated telecommunications providers have indicated that they want to start billing companies delivering services over the Internet a premium charge for priority access to connected customers. If these providers are able to charge companies such as us for this, our costs will increase, and this could affect our results of operations.
New technologies could displace our services or render them obsolete.
New technologies or industry standards, including those technologies protected by intellectual property rights, have the potential to replace or provide lower cost alternatives to our hosting, networking, and Internet access services. The adoption of such new technologies or industry standards could render our technology and services obsolete, unmarketable, or require us to incur significant capital expenditures to expand and upgrade our technology to meet new standards. We cannot guarantee that we will be able to identify new service opportunities successfully or, if identified, be able to develop and bring new products and services to market in a timely and cost-effective manner. In addition, we cannot guarantee that services or technologies developed by others will not render our current and future services non-competitive or obsolete or that our current and future services will achieve or sustain market acceptance or be able to effectively address the compatibility and interoperability issues raised by technological changes or new industry standards. If we fail to anticipate the emergence of, or obtain access to, a new technology or industry standard, we may incur increased costs if we seek to use those technologies and standards, or our competitors that use such technologies and standards may use them more cost-effectively than us.
The data networking and Internet access industries are highly regulated in many of the countries in which we currently operate or plan to provide services, which could restrict our ability to conduct business in the United States and internationally.
We are subject to varying degrees of regulation in each of the jurisdictions in which we provide services. Local laws and regulations, and their interpretation and enforcement, differ significantly among those jurisdictions, and can change significantly over time. Future regulatory, judicial, and legislative changes or interpretations may have a material adverse effect on our ability to deliver services within various jurisdictions. For example, the European Union enacted a data retention system that, once implemented by individual member states, will involve requirements to retain certain IP data that could have an impact on our operations in Europe. Moreover, national regulatory frameworks that are consistent with the policies and requirements of the World Trade Organization have only recently been, or are still being, put in place in many countries. Accordingly, many countries are still in the early stages of providing for and adapting to a liberalized telecommunications market. As a result, in these markets we may encounter more protracted and difficult procedures to obtain licenses.
Within the United States, the U.S. government continues to evaluate the data networking and Internet access industries. The Federal Communications Commission has a number of on-going proceedings that could affect our ability to provide services. Such regulations and policies may complicate our efforts to provide services in the future, including increasing the costs of certain services that we purchase from regulated providers. Our operations are dependent on licenses and authorizations from governmental authorities in most of the foreign jurisdictions in which we operate or plan to operate, and with respect to a limited number of our services, in the United States. These licenses and authorizations generally will contain clauses pursuant to which we may be fined or our license may be revoked on short notice. Consequently, we may not be able to obtain or retain the licenses necessary for our operations or be able to retain these licenses at costs which allow us to compete effectively.
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Our financial results will be negatively affected if the demand for data center space does not continue to increase to use the increased available capacity.
Recently, the demand for data center space has risen significantly causing the prices that we can charge our customers for our data center space to increase. Due to the increased demand, new data centers have been built in the markets in which we compete. If the demand for data center space in these markets does not continue to increase as these new data centers are built, there will be excess capacity in the marketplace which could lead to lower prices for our services and have a negative impact on our financial results.
Risks Related to Our Common Stock
Sales of a significant amount of our common stock in the public market could reduce our stock price or impair our ability to raise funds in new stock offerings.
We have approximately 53.0 million shares of common stock outstanding. Additionally, we have Convertible Notes, in-the-money stock options, and other equity awards outstanding that may be exercised or converted at various times to acquire 5.9 million shares, or approximately 11%, of our common stock on a fully diluted basis as of July 28, 2008. Shares issued upon exercise of our outstanding options and Convertible Notes will cause immediate and substantial dilution to our existing stockholders and may be immediately sold in the public markets. As of July 28, 2008, investment partnerships sponsored by Welsh, Carson, Anderson & Stowe (Welsh Carson) own approximately 29% of our outstanding common stock, and since December 2006, Welsh Carson has distributed over 12.1 million shares of our common stock to its limited partners. These shares may and some have been sold in the public market immediately following such distributions. Also, as of July 28, 2008, Welsh Carson and individuals affiliated with Welsh Carson are entitled to certain registration rights with respect to 14.2 million shares of our common stock held by them. Sales of substantial amounts of shares of our common stock in the public market, including sales following Welsh Carson distributions, or the perception that those sales will occur, could cause the market price of our common stock to decline. Those sales also might make it more difficult for us to sell equity and equity-related securities in the future at a time and at a price that we consider appropriate.
Our stock price is subject to significant volatility.
Since July 1, 2007, until the present, the closing price per share of our common stock has ranged from a high of $50.68 per share to a low of $10.89 per share. Our stock price has been, and may continue to be, subject to significant volatility due to sales of our securities by significant stockholders and the other risks and uncertainties described or incorporated by reference herein. The price of our common stock may also fluctuate due to conditions in the technology industry or in the financial markets generally.
Our certificate of incorporation, bylaws, and Delaware law contain provisions that could discourage a takeover.
Our certificate of incorporation and Delaware law contain provisions which may make it more difficult for a third party to acquire us, including provisions that give the Board of Directors the power to issue shares of preferred stock. We have also chosen to be subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prevents a stockholder of more than 15% of a company’s voting stock from entering into business combinations set forth under Section 203 with that company.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
At our annual meeting of stockholders held on May 20, 2008, the following matters were voted on:
1. | Election of ten directors to the Board of Directors. |
For | Withheld | |||
John D. Clark | 48,738,357 | 1,191,253 | ||
Clyde A. Heintzelman | 49,675,914 | 253,696 | ||
Philip J. Koen | 49,638,982 | 290,628 | ||
Thomas E. McInerney | 48,265,637 | 1,663,973 | ||
James E. Ousley | 49,722,990 | 206,620 | ||
James P. Pellow | 49,514,018 | 415,592 | ||
David C. Peterschmidt | 49,722,859 | 206,751 | ||
Jeffrey H. Von Deylen | 48,520,898 | 1,408,712 | ||
Mercedes A. Walton | 49,722,440 | 207,170 | ||
Patrick J. Welsh | 48,741,146 | 1,188,464 |
2. | Ratify the appointment of Ernst & Young, LLP as our independent registered public accounting firm for the year ending December 31, 2008. |
For | Against | Abstain | ||
49,914,104 | 13,952 | 1,554 |
ITEM 5. | OTHER INFORMATION. |
None.
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ITEM 6. | EXHIBITS. |
The following exhibits are either provided with this Form 10-Q or are incorporated herein by reference.
Exhibit | Filed with the | |||||||||
Exhibit Description | Incorporated by Reference | |||||||||
Form | Filing Date with the SEC | Exhibit | ||||||||
3.1 | Amended and Restated Certificate of Incorporation of the Registrant | S-1 | November 12, 1999 | 3.1 | ||||||
3.2 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | S-1/A | January 31, 2000 | 3.2 | ||||||
3.3 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | 10-Q | August 14, 2002 | 3.3 | ||||||
3.4 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | 10-Q | August 13, 2004 | 3.4 | ||||||
3.5 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | 10-Q | August 5, 2005 | 3.5 | ||||||
3.6 | Certificate of Amendment to Amended and Restated Certificate of Incorporation of the Registrant | 8-K | June 7, 2006 | 3.1 | ||||||
3.7 | Amended and Restated Bylaws of the Registrant | 10-Q | May 15, 2003 | 3.4 | ||||||
3.8 | Amendment to Article V of the Amended and Restated Bylaws | 8-K | May 15, 2007 | 3.1 | ||||||
4.1 | Form of Common Stock Certificate | S-1/A | January 31, 2000 | 4.1 | ||||||
4.2 | Indenture, dated as of May 9, 2007, between Registrant and The Bank of New York, as trustee, including the Form of Global Note attached as Exhibit A thereto | 8-K | May 10, 2007 | 4.1 | ||||||
10.1 | Facility Agreement dated June 27, 2008, by and among SAVVIS UK Limited, Registrant, and Lombard North Central Plc | 8-K | July 2, 2008 | 10.1 | ||||||
10.2 | Asset Security Agreement dated June 27, 2008, by and among SAVVIS UK Limited, Registrant, a Delaware corporation, and Lombard North Central Plc | 8-K | July 2, 2008 | 10.2 | ||||||
10.3 | Consent and Amendment No. 9 to Credit Agreement dated June 27, 2008, by and among SAVVIS Communications Corporation, Registrant, the lenders that are signatories thereto and Wells Fargo Foothill, Inc., as the arranger and the administrative agent for the lender parties | 8-K | July 2, 2008 | 10.3 | ||||||
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
32.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X | ||||||||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | X |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SAVVIS, Inc. | ||||
Date: August 1, 2008 | By: | /s/ Philip J. Koen | ||
Philip J. Koen | ||||
Chief Executive Officer | ||||
(principal executive officer) | ||||
Date: August 1, 2008 | By: | /s/ Jeffrey H. Von Deylen | ||
Jeffrey H. Von Deylen | ||||
Chief Financial Officer | ||||
(principal financial officer and principal accounting officer) |
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