Equinix, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results; year-over-year comparisons are against the same 2016 periods. Equinix operates colocation data centers and related interconnection and infrastructure services. More than 90% of revenue is recurring.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1,066.4 million | $900.5 million | $2,015.9 million | $1,744.7 million |
| Income from continuing operations before interest and taxes, as presented in the statement | $184.9 million | $151.7 million | $352.1 million | $264.3 million |
| Net income | $45.8 million | $44.7 million | $87.9 million | $13.6 million |
| Diluted EPS | $0.58 | $0.64 | $1.16 | $0.20 |
| Adjusted EBITDA (non-GAAP) | $509.3 million | $420.3 million | $936.9 million | $800.9 million |
| Operating cash flow | Not separately stated | Not separately stated | $553.8 million | $383.1 million |
- Q2 revenue rose 18% reported and 21% at constant currency; recurring revenue grew 19% reported and represented 95% of revenue. Six-month revenue increased 16% reported and 17% at constant currency.
- Q2 cost of revenue was 49% of revenue, versus 51% a year earlier; the resulting gross margin was approximately 51%. The statement’s $184.9 million operating-income subtotal equals approximately 17% of revenue. Net margin was approximately 4%.
- Q2 adjusted EBITDA margin was approximately 48%, versus approximately 47% in Q2 2016. Adjusted EBITDA is a company-defined non-GAAP measure and excludes, among other items, depreciation, stock compensation and acquisition costs.
- Six-month investing cash outflow was $4.253 billion, including $3.630 billion for acquisitions and $625.8 million of capital expenditures. Operating cash flow less capital expenditures was approximately negative $72 million; this is a simple calculation, not a company-reported measure.
- Cash and cash equivalents were $1.064 billion at June 30; short- and long-term investments totaled about $10.6 million. The company reported approximately $1.4 billion of additional availability under its $1.5 billion revolving facility, net of letters of credit.
- Total indebtedness, including capital lease and other financing obligations, was approximately $9.4 billion. Senior note principal was $5.1 billion; mortgage and loan principal was approximately $2.6 billion; financing obligations were approximately $1.65 billion. Q2 interest expense was $119.0 million; six-month interest expense was $230.7 million.
Material changes versus the prior comparable period
- Equinix completed its approximately $3.6 billion acquisition of Verizon’s colocation business on May 1, adding 29 data-center buildings in the United States, Brazil and Colombia. The acquired business contributed $86.7 million of revenue and $27.4 million of continuing-operations net income from May 1 through June 30. Purchase-price allocation remained provisional, including approximately $1.70 billion of customer-relationship intangibles and $1.09 billion of goodwill.
- Q2 net income rose modestly from $44.7 million to $45.8 million, while diluted EPS fell from $0.64 to $0.58, reflecting a larger share count after the March equity offering. Six-month net income increased from $13.6 million; the 2016 comparison included $11.6 million of discontinued-operations income and substantial acquisition-related foreign-exchange losses.
- Q2 interest expense increased from $100.3 million to $119.0 million, mainly following new borrowing. The company raised $2.13 billion net from a March share offering, issued $1.25 billion of 5.375% senior notes due 2027 and borrowed a €1.0 billion Term B-2 loan.
- Capital expenditures increased to $625.8 million for the first half from $447.6 million. Dividends paid rose to $304.4 million from $246.7 million; quarterly declared dividends were $2.00 per share, versus $1.75 a year earlier.
- Regional revenue grew in all three regions in Q2: Americas 29%, EMEA 7% and Asia-Pacific 13% reported. Excluding acquisitions and currency effects, expansion activity and orders from existing and new customers were important drivers.
Outlook, management commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management expects operating costs, sales and marketing, and general and administrative expenses to rise as the business expands; it also expects higher interest expense following first-quarter financing.
- Management said cash, operating cash generation and available revolver capacity should support operating needs, current announced expansion projects, debt repayments and regular dividends. It cautioned that further growth or acquisitions could require additional debt or equity financing.
- Utilization was approximately 79% excluding the Verizon acquisition, compared with 82% a year earlier excluding TelecityGroup and Bit-isle. Management estimated utilization at approximately 83% excluding recent expansion projects and acquisitions. Power availability and higher customer power density may constrain usable capacity and growth.
- Foreign currency movements materially affected reported results: EMEA revenue faced a $39.3 million unfavorable currency impact in the first half. Management noted that further U.S. dollar movements could significantly affect results. A hypothetical additional 10% dollar strengthening, with existing cash-flow hedges, was estimated to reduce six-month-period revenue and operating expenses by approximately $60.3 million and $69.8 million, respectively.
- Key risks include integrating the Verizon business and realizing expected benefits; maintaining REIT qualification and funding required distributions; substantial debt and lease commitments; power availability and electricity costs; customer demand and data-center utilization; foreign-exchange exposure; and execution of expansion and back-office systems projects. Management reported disclosure controls were effective, while acquisition integration remained in progress.
- Contractual commitments included $371.4 million of unaccrued capital expenditures and $592.0 million of other purchase commitments. The filing reported no legal proceedings. An at-the-market equity program of up to $750 million was established on August 4, 2017; no shares had been sold under it as of the filing.
Important facts for investors to verify
- Track the final Verizon acquisition valuation, integration costs, customer and landlord consents, transition-service arrangements, and the sustainability of the acquired contribution.
- Reconcile reported growth with acquisition timing, currency effects and expansion contributions; assess underlying utilization, power capacity and customer demand by market.
- Review debt maturities, variable-rate exposure, lease obligations, capital-spending needs and remaining revolver availability alongside cash generation and dividends.
- Monitor REIT compliance, taxable income and distribution requirements, including the announced $2.00-per-share dividend payable in September 2017.
- Assess the impact of the $750 million ATM program and any further equity issuance on dilution, leverage and funding plans.