Equinix, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Equinix operates global data centers providing colocation, interconnection and managed infrastructure services. This unaudited filing covers the three and six months ended June 30, 2012; year-over-year comparisons are to the corresponding 2011 periods. Unless otherwise indicated, amounts below are in U.S. dollars.
Key financial results
- Q2 revenue: $466.3 million, up 18% year over year (21% on a constant-currency basis). Recurring revenue was 95% of total revenue. For the first half, revenue was $918.5 million, up 21% (23% constant currency).
- Q2 profit: Operating income was $102.7 million, up 37%; operating margin was approximately 22.0%, versus 19.0% a year earlier. Net income was $37.6 million, including $36.4 million attributable to Equinix; diluted EPS was $0.73 versus $0.64. First-half net income attributable to Equinix was $71.0 million and diluted EPS was $1.44.
- Costs and margins: Q2 cost of revenue was $233.2 million, or 50% of revenue, compared with 55% a year earlier. Sales and marketing rose 29% to $47.8 million and general and administrative expense rose 23% to $80.7 million. Management cited growth investments, compensation and, in the Americas, consulting costs.
- Adjusted EBITDA: Non-GAAP adjusted EBITDA was $222.1 million in Q2, up from $181.3 million; first-half adjusted EBITDA was $437.2 million versus $348.6 million. Q2 adjusted EBITDA margin was approximately 47.6%, compared with 45.9%.
- Cash flow and investment: First-half operating cash flow was $320.8 million versus $258.1 million. Capital expenditures were $342.0 million, implying operating cash flow less capex of approximately negative $21.2 million. Cash and cash equivalents were $654.1 million at June 30; cash, cash equivalents and investments totaled $823.0 million. Cash increased $375.3 million during the half.
- Debt and liquidity: Management reported approximately $2.9 billion of total indebtedness at June 30, including $769.7 million principal of convertible notes, $1.5 billion of senior notes, $214.3 million of loans payable and $477.6 million of capital lease and other financing obligations. A new $750 million U.S. facility included a $200 million term loan and $550 million revolver; $528.6 million remained available on the revolver at June 30, with letters of credit outstanding. The company reported approximately $778.2 million of additional liquidity, including undrawn facilities.
- Balance sheet: Total assets were $5.72 billion and total liabilities were $3.58 billion at June 30. Stockholders’ equity was $2.07 billion. Property, plant and equipment, net, rose to $3.53 billion from $3.23 billion at year-end 2011.
Material changes versus the prior comparable period
- Revenue growth occurred in all regions; Asia-Pacific had the fastest Q2 reported growth at 27%, followed by the Americas at 17% and EMEA at 16%. EMEA revenue growth was 26% on a constant-currency basis, with the stronger U.S. dollar reducing reported results.
- Customer count increased 10% year over year to 5,854. Utilization was 80%, versus approximately 76%; management said it would have been approximately 85% excluding recently opened expansion capacity.
- First-half interest expense increased to $99.6 million from $75.0 million, mainly reflecting the 7.00% senior notes issued in 2011 and financing for expansion, partly offset by settlement of the 2.50% convertible notes.
- In April, substantially all $250 million principal of 2.50% convertible notes converted; Equinix paid $253.1 million in cash and issued 622,867 treasury shares. The notes were no longer outstanding at June 30.
- Foreign currency translation losses contributed to a $49.4 million comprehensive loss attributable to Equinix in Q2, despite positive net income. The stronger U.S. dollar also adversely affected reported international results.
Outlook, risks and unusual items
- Outlook: Management expected continued revenue growth from customer demand, expansion projects and acquisitions, and said adjusted EBITDA should continue to improve. It anticipated 2012 expansion construction activity similar to 2011 levels. The filing does not provide a clear formal revenue or EPS guidance range. The company stated an intention to become free-cash-flow positive in 2013, while cautioning that this goal may not be achieved.
- Post-quarter transactions: In July 2012 Equinix acquired Asia Tone for approximately $230.5 million and ancotel for approximately $85.7 million, using about $316.2 million of cash in total. The U.S. term loan was drawn to repay and terminate the Asia-Pacific financing; management expected a third-quarter debt-extinguishment loss of approximately $5.2 million. ALOG also drew on a 100 million Brazilian real facility to repay existing ALOG loans and fund operations.
- Expansion commitments: At June 30 the company had $188.0 million of unaccrued committed capital expenditures and $263.0 million of other purchase commitments. Management also expected another $100–$150 million of non-contractual expansion capital spending. Power availability, electricity prices, customer utilization and timely project completion could affect returns.
- Other risks and contingencies: The filing highlights substantial debt and lease obligations, refinancing and covenant risks, foreign exchange exposure, economic and customer-credit risks (including in Europe), competition, data-center service or power disruptions, and acquisition integration risks. Two securities-related class/derivative matters remained unresolved; the company had accrued no amounts and said potential loss could not be determined. The Pihana litigation had reached a global settlement process, with dismissal expected after the court order and filing of stipulations.
- Taxes: The first-half effective tax rate was 30.2% versus 25.6%, partly due to a valuation-allowance reassessment for Swiss foreign operations. Management expected cash income taxes to increase during the rest of 2012.
Important facts for investors to verify
- Whether post-quarter acquisitions deliver expected revenue, integration benefits and returns, and their final purchase-price allocations.
- Cash and debt balances after the July acquisitions, term-loan drawdown and repayment of regional loans; also review covenants, maturities and interest costs.
- Actual expansion capital spending, new-center opening schedules, utilization and power capacity relative to customer demand.
- Progress toward management’s stated 2013 free-cash-flow-positive intention, considering capital expenditures, interest and acquisition spending.
- Developments in the securities litigation and Pihana settlement, and any resulting financial exposure.