Equinix, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015. Equinix operates colocation data centers and related interconnection and managed infrastructure services. It completed the TelecityGroup acquisition on January 15, 2016; Bit-isle had been acquired in November 2015. Acquisition-related additions materially affect period comparisons.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $844.2 million | $643.2 million | +31% reported; +34% constant currency |
| Recurring revenue | $797.1 million (94% of revenue) | $609.7 million (95%) | +31% |
| Income from operations | $112.7 million | $151.4 million | -26% |
| Operating margin | 13.4% | 23.5% | Down 10.1 percentage points |
| Net income (loss) | $(31.1) million | $76.5 million | Declined to a loss |
| Diluted EPS | $(0.46) | $1.34 | Declined to a loss |
| Adjusted EBITDA (non-GAAP) | $380.7 million | $305.7 million | +24% |
| AFFO (non-GAAP) | $209.8 million | $221.8 million | -5% |
| Cash from operations | $104.3 million | $232.8 million | Down $128.5 million |
| Capital expenditures | $197.7 million | $150.1 million | +32% |
Gross margin was approximately 49%, versus 54% in Q1 2015, as cost of revenue grew 43%, faster than revenue. Adjusted EBITDA increased, but as a share of revenue it was approximately 45%, versus 48% a year earlier. The filing presents adjusted EBITDA and AFFO as non-GAAP measures; they should be considered alongside GAAP results.
Liquidity, debt and capital commitments
- Cash and cash equivalents were $633.8 million at March 31, down from $2.229 billion at December 31, 2015. Cash, cash equivalents and investments totaled approximately $650.1 million.
- Equinix reported approximately $7.2 billion of total indebtedness, including about $3.9 billion of senior notes, $1.6 billion of mortgage and loans payable, $1.6 billion of capital lease and other financing obligations, and $150.1 million principal on convertible notes.
- Approximately $1.5 billion of additional revolving-credit availability remained, net of $42.6 million of letters of credit. The company said it believed cash, operating cash flow and available credit were sufficient for operating needs, scheduled debt payments, dividends and announced expansions.
- The 4.75% convertible notes, with $150.1 million principal, were scheduled to mature June 15, 2016; holders could convert them under the applicable terms. Debt maturities shown for the remaining nine months of 2016 totaled $624.3 million.
- Quarterly dividend was $1.75 per share; $124.8 million of dividends were paid or accrued in financing cash flows. A further $1.75 dividend was declared May 4, payable June 15, 2016.
- Contractual commitments included $410.7 million of unaccrued capital expenditures and $442.4 million of other purchase commitments. Management estimated an additional $396.4 million to $496.4 million of non-contractual expansion capital expenditures. Minimum operating lease commitments were approximately $1.7 billion.
Material changes and unusual items
- TelecityGroup contributed $84.4 million of continuing-operations revenue from January 15 through March 31 and $40.7 million of adjusted EBITDA. The acquisition drove substantial additions to EMEA revenue and expenses. Purchase accounting remained provisional.
- TelecityGroup acquisition and related costs were $36.5 million, versus $1.2 million in the prior-year quarter. Higher depreciation and amortization, acquisition financing and foreign-exchange losses also weighed on results.
- Other expense was $60.7 million, primarily reflecting $63.5 million of foreign-currency losses associated with completing the TelecityGroup acquisition. Interest expense increased to $100.9 million from $68.8 million.
- Revenue from acquired Bit-isle was $34.2 million; the company reported a $4.2 million net loss from Bit-isle for the quarter.
- TelecityGroup data centers to be divested to secure European Commission approval were classified as held for sale; their results generated $6.2 million of discontinued-operations income after tax. No definitive buyer agreement or expected sale proceeds were disclosed. Total assets held for sale were $955.9 million.
- Investing cash outflow was $1.323 billion, principally due to $1.602 billion of acquisition cash outlays, partly offset by release of $466.7 million in restricted cash. Financing cash outflow was $376.4 million.
Outlook, commentary and risks
- No specific full-year revenue, earnings or cash-flow guidance is provided in the filing. Management expected continued revenue growth from organic demand, opened and planned data-center expansions, and acquisitions; expansion projects were expected to open during the remainder of 2016 and 2017.
- Management reported approximately 80% utilization, versus 79% a year earlier; excluding expansions opened in the prior 12 months, utilization would have been approximately 83%. Power availability and rising power use per cabinet may constrain usable capacity and growth.
- Management expected higher interest expense as acquisition-related and other borrowings flowed through results, and anticipated additional financing may be needed for expansions or acquisitions. Electricity costs, customer demand, currency movements and access to capital could affect results and liquidity.
- Key risks include integrating TelecityGroup and Bit-isle, executing required divestitures, realizing expected synergies, maintaining REIT qualification and distributions, substantial debt and lease obligations, foreign-exchange exposure, power constraints, and the cost and returns of ongoing data-center expansion. Failure to qualify as a REIT could result in significant corporate-level taxes.
- Foreign-exchange sensitivity was material: the filing estimated that, excluding hedges, an immediate 10% currency appreciation would increase quarterly revenue by $45.5 million and pretax income by $6.3 million; a 10% depreciation would reduce them by $46.2 million and $7.3 million, respectively.
- Management concluded disclosure controls were effective at quarter-end. Integration-related control changes were still being evaluated. The filing reported no legal proceedings.
Most important facts for investors to verify
- Track organic, constant-currency growth separately from acquisition-driven growth, especially in EMEA and Asia-Pacific.
- Review final TelecityGroup purchase accounting, divestiture agreements, sale proceeds and the effect of divested operations on continuing results.
- Assess whether operating cash generation can support the dividend, debt maturities and committed and planned expansion spending; monitor the June 2016 convertible-note maturity and refinancing.
- Reconcile GAAP losses and declining AFFO with EBITDA growth, and assess acquisition costs, depreciation, interest and foreign-exchange effects.
- Monitor utilization, power capacity, customer bookings and churn, REIT compliance, and integration progress, including internal controls and back-office systems.