Equinix, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Comparisons are with the corresponding 2014 periods. Amounts below are in U.S. dollars.
Business context
Equinix operates colocation, interconnection and related data-center services across the Americas, EMEA and Asia-Pacific. Its recurring-revenue model generated 94% of Q2 revenue. The company began operating as a REIT for U.S. federal tax purposes on January 1, 2015 and received a favorable IRS private-letter-ruling response in May.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $665.6 million | $605.2 million | $1,308.8 million | $1,185.2 million |
| Operating income | $139.1 million | $124.7 million | $290.6 million | $246.3 million |
| Net income attributable to Equinix | $59.5 million | $11.3 million | $135.9 million | $52.7 million |
| Diluted EPS | $1.03 | $0.22 | $2.37 | $1.04 |
| Adjusted EBITDA | $311.3 million | $275.3 million | $617.0 million | $535.7 million |
| AFFO | $221.4 million | $187.6 million | $443.1 million | $360.3 million |
| Operating cash flow | Not presented separately | Not presented separately | $445.3 million | $270.7 million |
Q2 revenue grew 10% reported and 18% at constant currency; six-month revenue grew 10% reported and 18% constant currency. Q2 operating margin was approximately 20.9%, versus 20.6% a year earlier; net margin was approximately 8.9%, versus 1.9%. Adjusted EBITDA margin was approximately 46.8% in Q2, versus 45.5%. Adjusted EBITDA and AFFO are non-GAAP measures; the filing provides reconciliations and describes their exclusions.
Q2 revenue grew across all regions: Americas 9% reported, EMEA 11%, and Asia-Pacific 14%. At constant currency, growth was 11%, 29% and 24%, respectively. Management attributed growth primarily to customer orders and recently opened data-center expansions. Colocation and interconnection were the largest service categories.
Balance sheet, debt and liquidity
- At June 30, 2015, cash and cash equivalents were $336.1 million; short- and long-term investments totaled $99.4 million. The company reported $435.6 million of cash, cash equivalents and investments, excluding restricted cash.
- Restricted cash was $533.5 million, including approximately $493.8 million placed in connection with the TelecityGroup offer.
- Total liabilities were $5.62 billion and stockholders’ equity was $2.20 billion. The company reported approximately $4.7 billion of total indebtedness, including approximately $2.75 billion of senior notes, $565.0 million of mortgage and loans payable, $1.2 billion of capital-lease and other financing obligations, and $157.9 million principal on convertible notes.
- Current liabilities were $817.7 million, compared with $643.8 million at year-end 2014. The current portion of convertible debt was $149.8 million; the 4.75% convertible notes mature in June 2016 if not converted.
- Approximately $956.2 million remained available under the $1.0 billion revolving facility after letters of credit. A separate $1.34 billion bridge facility for the proposed TelecityGroup acquisition had not been drawn at June 30. Equinix said it intended to arrange permanent financing before closing.
Cash flow, investment and distributions
For the first six months, investing activities used $498.4 million, including $493.8 million transferred to restricted cash, $371.5 million of property and equipment purchases, and $38.3 million for San Jose land, partly offset by investment sales and maturities. Financing activities used $218.4 million, including $193.0 million of dividends and debt repayments, partly offset by $490.0 million borrowed under the amended term loan. Cash and cash equivalents declined by $274.8 million to $336.1 million.
Capital expenditures are increasing with expansion activity. The company disclosed $260.0 million of unaccrued contractual capital commitments and estimated an additional $443.6–$523.7 million of non-contractual capital spending for expansion projects. Quarterly cash dividends declared in 2015 were $1.69 per share; a further $1.69 dividend was declared in July for payment in September.
Material changes and unusual items
- Net income improved substantially year over year, in part because Q2 2014 included a $51.2 million loss on debt extinguishment; Q2 2015 had no such charge.
- Q2 2015 acquisition costs rose to $9.9 million from $0.7 million, primarily related to the TelecityGroup transaction. Six-month costs were $11.0 million versus $0.9 million.
- Interest expense increased to $74.5 million in Q2 from $66.9 million, and to $143.3 million for the first half from $135.7 million. Management expected higher interest expense as prior financings flowed through and as growth or acquisition financing was added.
- The effective tax rate for the first half fell to 9.2% from 18.3%, primarily reflecting the REIT conversion. U.S. REIT and qualified-subsidiary taxable income is generally offset by the dividends-paid deduction, but taxable REIT subsidiaries and foreign operations remain subject to tax.
- Foreign-exchange movements materially affected reported results and accumulated other comprehensive loss. The stronger U.S. dollar reduced translated international revenue; first-half foreign-currency translation losses were $76.9 million.
- The company acquired Nimbo Technologies in January for $10 million cash plus contingent consideration. The filing says its operating results were not significant.
Outlook, risks and contingencies
Management expected revenue to continue growing as recent and planned data-center expansions ramped, with openings planned in multiple markets during the remainder of 2015 and 2016. It also expected higher operating expenses as the business scaled, higher interest expense, and further acquisition costs through the TelecityGroup transaction. The filing gives no specific consolidated revenue or earnings guidance.
Equinix announced a cash-and-share offer for TelecityGroup valued at approximately $3.6 billion and expected to close in the first half of 2016, subject to regulatory, shareholder, court and listing conditions. Failure to satisfy the regulatory condition by the stated deadline could trigger a £50 million payment to TelecityGroup. The company estimated 2015 special distributions, including related deemed distributions, at $580–$680 million; it anticipated paying up to 20% in cash and at least 80% in stock, but the amount and mix could differ.
Key risks include completing and financing the TelecityGroup acquisition, integrating acquired operations, maintaining REIT qualification and meeting distribution requirements, substantial debt and lease obligations, foreign-exchange volatility, power availability and cost, capacity constraints, expansion returns, and possible customer billing or collection delays. The filing notes rising days sales outstanding associated with billing-system changes and warns that unresolved collection delays could affect cash flow and liquidity. It reports no legal proceedings. Management concluded disclosure controls were effective; North American quote-to-order and billing-system changes were made during the quarter, with related control processes updated.
Important facts for investors to verify
- Progress toward TelecityGroup regulatory approvals, expected closing, permanent financing, and the potential £50 million termination payment.
- Final size, timing and cash-versus-stock mix of the estimated $580–$680 million 2015 special distributions, and the remaining REIT-related tax liabilities.
- Whether billing-system changes resolve elevated DSO and whether customer collections convert reported earnings into operating cash flow.
- Expansion spending, utilization, power capacity and customer demand, including the return on committed and planned capital expenditures.
- Debt maturities and refinancing needs, especially the June 2016 convertible notes, and the effect of additional borrowing on interest expense and liquidity.
- Currency impacts and continued REIT compliance, including the ability to meet distribution requirements without constraining investment or financing flexibility.