Equinix, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing was signed March 2, 2015. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
Equinix operates a global platform of colocation data centers and interconnection services, serving more than 4,800 companies across 33 markets. It reported three geographic segments: Americas, EMEA, and Asia-Pacific. Approximately 95% of 2014 revenue was recurring. At year-end, the company operated 102 IBX data centers, with overall cabinet utilization of 78% (81% excluding expansions opened during the prior 12 months).
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $2,443.8 | $2,152.8 | +14% reported; +15% constant currency |
| Recurring revenue | $2,317.8 | $2,050.0 | +13% |
| Income from operations | $509.3 | $460.9 | +10% |
| Operating margin | 20.8% | 21.4% | Down 0.6 percentage points |
| Adjusted EBITDA | $1,113.9 | $1,000.9 | +11% reported; +12% constant currency |
| Net income (loss) attributable to Equinix | $(259.5) | $94.7 | Turned to loss |
| Diluted EPS | $(4.96) | $1.89 | Turned to loss |
| Cash from operating activities | $689.4 | $604.6 | +14% |
| Cash used in investing activities | $(435.8) | $(1,169.3) | Lower outflow |
| Capital expenditures | $677.0 | $696.8 | Down 3% |
Gross profit was $1,245.9 million, or approximately 51% of revenue; the filing reports cost of revenues at 49% of revenue in both 2014 and 2013. Interest expense was $270.6 million, compared with $248.8 million in 2013. The company recorded a $345.5 million income tax expense, including a $324.1 million charge from derecognizing U.S. deferred tax assets and liabilities following REIT-conversion approval. It also recorded a $157.0 million loss on debt extinguishment.
At December 31, 2014, cash, cash equivalents, and investments totaled $1,140.8 million; total assets were $7,817.4 million and stockholders’ equity was $2,270.1 million. Total indebtedness was approximately $4.7 billion. The company had $956.7 million available under its $1.0 billion revolving credit facility, net of outstanding letters of credit. Minimum operating lease commitments were $993.3 million, excluding potential renewals.
Material changes versus the prior year
- Revenue grew in each region. EMEA reported the fastest growth at 21%, followed by Asia-Pacific at 19% and Americas at 9% (reported rates).
- Quarterly revenue increased through 2014, from $580.1 million in Q1 to $638.1 million in Q4. Q4 attributable net loss was $355.1 million, principally reflecting the REIT-related tax charge and debt-extinguishment costs.
- Revenue growth was supported by new and expanded data-center capacity and customer demand. Year-end utilization rose to 78% from 76%.
- Operating expenses grew faster than revenue in several areas: sales and marketing increased 20% and general and administrative expense increased 17%. Operating margin consequently declined slightly.
- Operating cash flow improved, but management said higher days sales outstanding (DSO), billing changes, and slower collections weighed on cash flow and liquidity.
- Equinix acquired the remaining ALOG ownership in 2014, taking its interest to 100%. It also refinanced: issued $1.25 billion of senior notes, redeemed $750 million of 7.00% notes, and entered a new $1.5 billion credit facility.
Outlook, REIT transition, and risks
- Equinix began operating as a REIT on January 1, 2015. Management expected a long-term worldwide cash tax rate of 10%–15%, subject to REIT qualification and other tax considerations. The filing provides no clear quantitative 2015 revenue or earnings guidance.
- Management expected continued revenue and adjusted EBITDA growth and said 2015 data-center expansion construction activity would exceed 2014 levels. Several expansion phases were scheduled to open during 2015 and 2016.
- The company estimated $580–$680 million of 2015 special distributions, together with expected deemed distributions related to convertible-note conversion-rate adjustments. It expected at least 80% of the 2015 special distributions to be paid in stock and up to 20% in cash. The filing also cited approximately $1.0–$1.1 billion for 2014 and 2015 special distributions combined, including the expected value of deemed distributions; these estimates are not directly equivalent to cash payments.
- Equinix expected to begin quarterly dividends in 2015 and announced a $1.69-per-share cash dividend payable March 25, 2015. REIT rules generally require distribution of at least 90% of REIT taxable income; distributions are not guaranteed and could require external financing.
- Management estimated $360–$370 million of tax liabilities related to depreciation and amortization recapture; $281 million had been settled by year-end 2014. It also expected about $10 million in annual REIT compliance costs beginning in 2015.
- Key risks include failure to qualify or remain qualified as a REIT; substantial debt and lease commitments; dependence on reliable power, cooling, and network connectivity; foreign-exchange exposure; capacity constraints from rising power demand; execution and demand risk in expansion projects; and competition and pricing pressure.
- DSO had increased amid centralized EMEA billing and collections and implementation of a new billing system, with full implementation expected later in 2015. Management viewed the issues as temporary but warned unresolved delays could continue to affect operating cash flow and liquidity.
- Back-office system changes materially affected or were reasonably likely to materially affect internal controls during 2014. Management and the auditor concluded controls were effective as of year-end, while the filing noted elevated execution risk as system work continued.
Most important facts for investors to verify
- How much of the 2014 net loss was non-cash or transaction-related, and how reported earnings compare with recurring operating performance.
- Actual 2015 REIT distributions, their stock-versus-cash mix, and the cash required for tax recapture and regular dividends.
- Whether DSO and collections improved after billing-system implementation, and whether operating cash flow followed revenue growth.
- Expansion spending, opening dates, power availability, utilization, and customer demand against the company’s expected returns.
- Debt maturities, covenant headroom, refinancing needs, and total fixed obligations, including leases and financing obligations.
- Ongoing REIT eligibility, tax liabilities, and any changes in expected tax rates or special-distribution estimates.