Equinix, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. This unaudited quarterly filing covers the three and six months ended June 30, 2011. Equinix operates data centers and provides colocation, interconnection, and managed infrastructure services. Results include ALOG from April 25, 2011; the prior-year comparison includes Switch & Data from May 1, 2010. Accordingly, reported growth reflects both organic performance and acquisitions.
Key financial metrics
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $394.9 | $296.1 | $757.9 | $544.7 |
| Income from operations | $74.9 | $40.2 | $146.2 | $88.2 |
| Operating margin | 19.0% | 13.6% | 19.3% | 16.2% |
| Net income (loss) attributable to Equinix | $30.7 | $(2.3) | $55.9 | $11.9 |
| Diluted EPS | $0.64 | $(0.05) | $1.18 | $0.28 |
| Adjusted EBITDA (non-GAAP) | $181.3 | $132.2 | $348.6 | $249.4 |
| Cash from operating activities | Not stated by quarter | Not stated by quarter | $258.1 | $156.7 |
- Revenue increased 33% year over year in Q2 (28% on a constant-currency basis) and 39% for the first half (36% constant currency). Recurring revenue was 95% of total revenue in both comparison periods.
- Q2 gross margin was approximately 45.4%, versus 45.1%; first-half gross margin was approximately 45.9%, versus 45.7%. Adjusted EBITDA margin was approximately 45.9% in Q2 versus 44.6%, and 46.0% for the first half versus 45.8%.
- Q2 operating expenses included $1.6 million of acquisition costs and $0.1 million of restructuring charges. First-half interest expense was $75.0 million, up from $63.3 million. First-half income tax expense was $19.2 million; the effective tax rate was 25.6%.
- At June 30, cash and cash equivalents were $297.9 million and short- and long-term investments were $125.2 million, totaling $423.1 million. Current assets were $649.1 million and current liabilities $620.5 million. Cash declined by $145.0 million during the first half.
- First-half investing cash use was $496.1 million, including $364.0 million of property and equipment purchases and $95.9 million added to restricted cash. Financing provided $88.0 million. Restricted cash totaled approximately $101.9 million, principally associated with the Paris 4 project.
- At June 30, debt and financing obligations included approximately $1.0 billion of convertible-note principal, $750 million of senior notes, $232.7 million of loans payable, and $346.7 million of capital lease and other financing obligations. The company reported total indebtedness of approximately $2.3 billion.
Material changes versus the prior comparable period
- Growth was broad-based: Q2 revenue rose 32% in the Americas, 34% in EMEA, and 37% in Asia-Pacific. For the first half, reported increases were 43%, 31%, and 36%, respectively. Acquisition contribution and foreign exchange contributed to reported growth; management attributed the balance primarily to higher orders from existing and new customers.
- Excluding ALOG, customer count rose 13% to 4,135 from 3,661. Utilization was 76% versus approximately 74%; excluding centers open for less than four full quarters, utilization was approximately 86%.
- Operating income and net income improved substantially. Revenue growth outpaced operating expense growth, while cost of revenue remained approximately 55% of Q2 revenue and 54% of first-half revenue.
- Capital investment increased: first-half property and equipment purchases were $364.0 million, up from $292.1 million. Net cash used in investing activities rose to $496.1 million from $359.0 million.
- Equinix acquired an indirect controlling interest of approximately 53% in ALOG, which operates three Brazilian data centers. The preliminary allocation included $104.8 million of goodwill; ALOG contributed $11.7 million of revenue from acquisition through June 30.
Outlook, commentary, risks and contingencies
- Outlook: Management expected revenue to continue growing as new and expanded data centers ramp and as customer bookings develop. Planned expansion openings included projects in the Americas, EMEA, and Asia-Pacific during 2011 and 2012. The filing provides no specific consolidated revenue or earnings guidance.
- Management expected operating costs to rise in absolute dollars with growth. It anticipated significantly higher interest expense from the July 2011 issuance of $750 million of 7.00% senior notes, estimated at approximately $53.9 million of annual interest. Net proceeds were approximately $735.6 million; intended uses included expansion and repayment of the 2.50% convertible notes due April 2012.
- The company stated it believed available liquidity and expected operating cash flow were sufficient for operating needs and publicly announced expansion projects. However, it noted additional expansion or acquisitions could require financing, which might be unavailable or costly. Contractual commitments included $234.5 million of unaccrued capital expenditures; management also expected approximately $300–$350 million of additional, non-contractual expansion capital expenditures.
- Principal operating risks include power availability and rising electricity costs, increasing power demand per cabinet, construction delays or cost overruns, customer demand and collection risk, competition and pricing pressure, foreign exchange exposure, and data-center outages or security incidents. The filing specifically noted potential electricity-supply effects in Japan following the March 2011 earthquake and tsunami; Japanese facilities were operating as of the filing date.
- Foreign currency translation benefited reported revenue during the period as the U.S. dollar weakened against several operating currencies. Management cautioned that future exchange-rate movements could materially affect reported revenue, expenses, and financial position.
- Several shareholder and securities-related suits were pending, including a 2011 securities class action and derivative actions. Equinix said outcomes and potential losses could not be determined and recorded no accrual because it did not consider an unfavorable outcome probable. The older IPO litigation settlement remained subject to appeal; the Pihana litigation was also on appeal after dismissal of claims.
- Other notable exposures include $118.8 million of other purchase commitments, operating leases, and environmental and climate-related regulation that could increase electricity or compliance costs. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of revenue and profit growth was organic versus attributable to Switch & Data, ALOG, and currency movements.
- Whether utilization, bookings, customer retention, and power capacity support the planned expansion pipeline and its expected returns.
- The effect of the July 2011 notes offering on net debt, repayment of the 2012 convertible notes, annual interest expense, and future refinancing needs.
- Cash requirements and timing for restricted funds, contractual capital commitments, and management’s additional projected expansion spending.
- Developments in pending litigation, the ALOG purchase-price allocation and contingent consideration, and any changes to legal or tax exposures.