Equinix, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Equinix operates global data centers providing colocation, interconnection and managed infrastructure services. Financial amounts below are in U.S. dollars; “million” and “billion” are used for readability.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $488.7 million | $408.2 million | $1,389.2 million | $1,147.7 million |
| Income from continuing operations | $95.9 million | $77.4 million | $298.7 million | $223.0 million |
| Net income attributable to Equinix | $28.8 million | $20.3 million | $99.8 million | $76.2 million |
| Diluted EPS | $0.58 | $0.20 | $2.03 | $1.37 |
| Adjusted EBITDA (non-GAAP) | $228.3 million | $187.0 million | $656.4 million | $527.1 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $422.9 million | $400.0 million |
Q3 revenue rose 20% year over year (23% on a constant-currency basis); nine-month revenue rose 21% (23% constant currency). Recurring revenue represented 94% of Q3 revenue and 95% of nine-month revenue. Colocation was the largest service category. Approximate Q3 gross margin was 49% versus 46%; operating margin was 19.6% versus 19.0%. Nine-month operating margin was approximately 21.5% versus 19.4%.
Q3 revenue growth across the Americas, EMEA and Asia-Pacific was approximately 13%, 21% and 47%, respectively. Acquisitions contributed to EMEA and Asia-Pacific growth. Excluding the recent IBX expansions, management said utilization would have been approximately 82%; reported utilization was 76%, compared with 81% a year earlier, partly reflecting newly opened capacity.
Cash, debt and liquidity
- At September 30, cash and cash equivalents were $239.7 million; short- and long-term investments totaled $280.1 million. Combined cash and investments were $519.8 million, down from $1,076.3 million at December 31, 2011.
- Nine-month investing cash flow was an outflow of $233.5 million, including $554.1 million of property and equipment purchases and $273.0 million paid for the Asia Tone and ancotel acquisitions. Financing cash flow was an outflow of $235.0 million.
- Total debt and financing obligations were approximately $3.0 billion, including $769.7 million principal of convertible notes, $1.5 billion of senior notes, $248.7 million of loans payable and $502.7 million of capital lease and other financing obligations.
- The new $750 million U.S. credit facility included a $200 million term loan and a $550 million revolving line. After letters of credit, $528.5 million was available; Equinix reported compliance with its covenants.
- Management said available liquidity and expected operating cash flow were sufficient for current operating needs, announced expansions and expected debt repayments. It cautioned that weaker customer collections or market conditions could impair liquidity.
Material changes and unusual items
- Equinix acquired Asia Tone for net consideration of approximately $208.3 million and ancotel for approximately $85.7 million in July. Their Q3 revenues included in Equinix results were $10.6 million and $5.5 million, respectively.
- The company repaid and terminated its Asia-Pacific financing, recording a $5.2 million debt-extinguishment loss. It also settled almost all $250 million principal of its 2.50% convertible notes in April using $253.1 million cash plus 622,867 treasury shares.
- In August, Equinix agreed to sell 16 U.S. data centers. The sale closed in November, after quarter-end, for approximately $76.5 million net proceeds and generated an estimated $26 million pretax gain. The assets and related results were classified as held for sale and discontinued operations in this filing.
- Q3 income tax expense was $13.5 million, with a 32.1% effective tax rate, versus $5.1 million and 20.3% a year earlier. The nine-month effective rate rose to 30.7% from 24.1%, including the effect of a valuation allowance and tax changes related to the proposed REIT conversion.
- Foreign currency was a headwind to reported results: management estimated a $9.5 million Q3 revenue impact in EMEA and $4.6 million in the Americas. It stated that dollar movements can materially affect reported results.
Outlook, risks and contingencies
- The board approved pursuing REIT conversion, targeting a tax election effective January 1, 2015, subject to IRS rulings and other requirements. The filing gives no formal revenue or earnings guidance. Management expected revenue growth from customer demand and recently opened or planned expansions.
- Management estimated REIT-related implementation costs of $50–$80 million and tax liabilities of $340–$420 million from depreciation recapture; these tax liabilities could remain payable even if conversion is abandoned. Equinix expected $200–$300 million in cash taxes in 2013 and estimated an accumulated earnings-and-profits distribution of $700 million–$1.1 billion, anticipated mostly in stock. These are estimates, not guaranteed outcomes.
- Management expected annual REIT compliance costs of $5–$10 million if conversion succeeds, and approximately $5 million of additional annual interest expense from the ALOG financing. It also described an intention to become free-cash-flow positive in 2013, while warning that this goal may not be achieved.
- Key operating risks include power availability and rising power costs, capacity constraints, construction and expansion execution, foreign exchange exposure, customer credit and churn, competition, and reliance on third-party connectivity. The filing also highlights substantial debt, lease commitments, and the possibility that expansion or acquisition returns may fall short.
- As of September 30, contractual commitments included $90.3 million of unaccrued capital expenditures and $259.6 million of other purchase commitments. Expected additional, non-contractual expansion capital spending was $90–$120 million. Minimum operating lease commitments were approximately $948.3 million.
- A federal securities class action and related derivative suits remained unresolved; Equinix said the potential loss could not be estimated and recorded no accrual because an unfavorable outcome was not considered probable. The Pihana litigation was dismissed with prejudice in August 2012.
Important facts for investors to verify
- Progress and IRS outcomes for the REIT plan, including final tax cost, distribution size and timing, and the effect on cash available for investment.
- Whether recurring revenue, customer demand and utilization support returns on the company’s large data-center expansion program.
- Debt maturities, covenant headroom, interest expense and liquidity after taxes, capital spending and the planned stockholder distribution.
- Integration and performance of Asia Tone and ancotel, and the actual proceeds and gain from the November data-center sale.
- Developments in the securities litigation, power and utility costs, foreign exchange exposure, and customer collections, particularly in EMEA.