Equinix, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are with Q1 2014 unless noted. Equinix operates colocation data centers and provides interconnection and related infrastructure services across the Americas, EMEA, and Asia-Pacific. The company began operating as a REIT for U.S. federal tax purposes on January 1, 2015.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change / context |
|---|---|---|---|
| Revenue | $643.2m | $580.1m | Up 11% reported; 17% at constant currency |
| Operating income | $151.4m | $121.6m | Up 25%; operating margin about 23.5%, versus 21.0% |
| Net income attributable to Equinix | $76.5m | $41.4m | Up about 85% |
| Basic / diluted EPS | $1.35 / $1.34 | $0.83 / $0.81 | Higher earnings; weighted-average shares also increased |
| Adjusted EBITDA (non-GAAP) | $305.7m | $260.4m | Up 17%; margin about 47.5%, versus 44.9% |
| Operating cash flow | $232.8m | $171.7m | Increased $61.1m |
| Capital expenditures | $188.4m | $122.7m | Cash-flow purchases of PP&E and real estate; includes $38.3m San Jose land purchase |
Recurring revenue was $609.7m, or 95% of total revenue. Colocation revenue rose to $481.5m from $434.6m, and interconnection revenue to $101.7m from $87.0m; managed infrastructure revenue declined to $23.9m from $25.4m. Revenue grew in all three regions. Asia-Pacific had the highest reported regional growth at 16%; currency-adjusted growth was 25% in EMEA and Asia-Pacific and 12% in the Americas.
Cost of revenue increased 4% reported, slower than revenue growth. It represented 46% of revenue, versus 50% a year earlier. Sales and marketing expense rose 17% to $78.6m and general and administrative expense rose 10% to $113.6m. Interest expense was essentially flat at $68.8m. The effective tax rate fell to 7.5% from 24.7%, primarily because of the REIT conversion.
Balance sheet, debt and liquidity
At March 31, 2015, cash and cash equivalents were $536.7m, short- and long-term investments totaled $533.0m, and total assets were $7.73bn. Current assets were $1.44bn and current liabilities $666.4m. Total liabilities were $5.57bn and stockholders’ equity was $2.16bn.
Equinix reported approximately $4.7bn of total indebtedness, including $2.75bn of senior notes, $566.9m of mortgage and loan principal, $157.9m of convertible note principal, and approximately $1.2bn of capital lease and other financing obligations. It also reported $999.6m of minimum operating lease commitments, excluding potential renewals. The $1.0bn revolving facility had approximately $955.9m available after letters of credit.
Cash and investments declined from $1.14bn at year-end to about $1.07bn. Cash fell by $74.2m during the quarter: operating cash flow was outweighed by $199.8m of investing outflows and $98.8m of financing outflows. Financing outflows included $96.6m of dividends. The company paid a $1.69-per-share quarterly dividend.
Material changes, outlook and notable items
- REIT transition: The lower tax provision reflects the new REIT status; taxable REIT subsidiaries and foreign operations remain subject to tax. Equinix estimated total tax liabilities of $360m–$370m from depreciation and amortization recapture, of which $281m had been settled by March 31.
- Special distributions: Management expected fourth-quarter 2015 special distributions, together with deemed distributions related to convertible-note conversion-rate adjustments, to total approximately $580m–$680m. It anticipated paying up to 20% in cash and at least 80% in common stock, subject to change.
- Growth investment: Management expected revenue and adjusted EBITDA to continue growing, supported by organic demand and data-center expansions. It expected 2015 expansion construction activity to exceed 2014 levels. Further expansion, acquisitions, or joint ventures could require additional financing.
- Capacity: Utilization was approximately 79%, versus 75% a year earlier; excluding expansion projects opened in the prior 12 months, management estimated utilization at about 83%. Power availability and rising customer power needs can constrain usable capacity even when physical space is available.
- Currency: A stronger U.S. dollar reduced reported international revenue; management cited unfavorable Q1 impacts of about $24.5m in EMEA, $8.7m in Asia-Pacific, and $5.2m in the Americas. Currency movements also materially reduced other comprehensive income, including a $146.3m translation loss.
- Collections and cash flow: Management reported rising days sales outstanding, citing billing and collection process changes and the ongoing billing-system implementation. Certain significant receivables anticipated in March were collected in April.
- Acquisition and lease item: Equinix acquired Nimbo Technologies for $10m cash plus a contingent earn-out and recorded $17.2m of goodwill. An Atlanta data-center lease amendment resulted in capital-lease accounting and recognition of about $26m of lease assets and liabilities.
- Subsequent event: On April 30, Equinix repaid and re-borrowed the $490m term-loan balance in approximately equivalent amounts denominated in euros, British pounds, Swiss francs, and Japanese yen.
- Contingencies and controls: The company disclosed $214.3m of unaccrued capital expenditure commitments and $339.2m of other purchase commitments. It reported no legal proceedings and concluded disclosure controls were effective; new REIT compliance controls were implemented.
Important risks and items to verify
- Whether Equinix qualifies and remains qualified as a REIT, including the status of its expected IRS private letter ruling and compliance with distribution, income, and asset tests.
- The final amount and cash-versus-stock composition of 2015 special distributions, and the resulting effects on liquidity, dilution, and financing needs.
- Whether data-center expansion spending, utilization, customer demand, and power availability support expected returns and revenue growth.
- Whether higher days sales outstanding and billing-system changes are resolved, and whether operating cash flow remains sufficient alongside dividends, taxes, and investment spending.
- Foreign-exchange exposure and the impact of continued dollar movements on reported results, asset values, and hedging.
- Debt, lease obligations, credit-facility covenants, refinancing access, and the company’s capacity to fund expansion and REIT distributions.
Management’s forward-looking statements are subject to risks and uncertainties; the filing does not provide a specific numerical revenue or earnings forecast.