Equinix, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited. Equinix operates colocation, interconnection and managed infrastructure services through data centers in 38 markets. Results include ALOG from April 25, 2011; ALOG was acquired through a structure giving Equinix an approximately 53% indirect controlling interest.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $417.6m | $330.3m | $1,175.5m | $875.1m |
| Income from operations | $78.1m | $52.0m | $224.3m | $140.2m |
| Net income | $20.6m | $11.2m | $76.5m | $23.1m |
| Net income attributable to Equinix | $20.3m | $11.2m | $76.2m | $23.1m |
| Diluted EPS attributable to Equinix | $0.20 | $0.24 | $1.37 | $0.53 |
| Adjusted EBITDA (non-GAAP) | $191.6m | $146.5m | $540.2m | $395.9m |
Q3 revenue grew 26% year over year; operating income increased 50%. Approximate operating margin was 18.7%, versus 15.7% in Q3 2010. Nine-month revenue grew 34% and operating margin was approximately 19.1%, versus 16.0%. Recurring revenue was 95% of total revenue in both periods. Q3 regional revenue growth was 25% in the Americas, 27% in EMEA and 34% in Asia-Pacific; constant-currency growth was 25%, 17% and 22%, respectively. Growth reflected customer demand and utilization, expansion openings, currency movements and acquisitions.
Q3 diluted EPS was lower year over year despite higher net income. The filing attributes EPS calculation to the two-class method and reports adjustments related to redeemable non-controlling interests; these adjustments reduced the earnings amount used for basic and diluted EPS to $9.7m in Q3 2011. ALOG contributed $17.9m of Q3 revenue and $0.8m of net income to consolidated results.
- Margins and costs: Q3 cost of revenue was $228.2m, or 55% of revenue, compared with 56% a year earlier. Sales and marketing rose to $43.1m from $31.2m; general and administrative expense rose to $66.0m from $58.6m. Nine-month cost of revenue was 54% of revenue versus 55% in 2010.
- Cash flow: Nine-month operating cash flow was $400.0m, up from $270.0m. Investing cash outflow was $1.305bn, including $495.5m of property, plant and equipment purchases, investment purchases and restricted-cash funding. Financing cash inflow was $832.1m. Cash and cash equivalents ended at $370.5m, down from $442.8m at year-end 2010.
- Liquidity: Cash, cash equivalents and short- and long-term investments totaled $1.170bn, compared with $592.8m at December 31, 2010. The company also reported $131.0m available under its revolving credit facility and approximately $4.7m available under Asia-Pacific financing.
- Debt: Total indebtedness was approximately $3.1bn, as characterized by management. The balance sheet reported $1.5bn of senior notes, $1.020bn carrying value of convertible debt, $236.6m of loans payable and $388.2m of capital lease and other financing obligations. The $250m 2.50% convertible notes mature in April 2012 and are included in current liabilities. Interest expense was $51.1m for Q3 and $126.2m for the nine months, versus $38.4m and $101.7m, respectively.
Material changes and transactions
- In July, Equinix issued $750m of 7.00% senior notes due 2021, adding to the existing $750m of 8.125% notes due 2018. Management expects the new notes to add approximately $53.9m of annual interest expense once fully reflected.
- In September, the company replaced its $25m revolving facility with a five-year, $150m senior unsecured revolving credit line. It had $131.0m of borrowing availability at quarter-end and was in compliance with its financial covenants.
- ALOG was consolidated from April 25, 2011. The acquisition added $104.8m of preliminary goodwill and $66.8m of redeemable non-controlling interests; additional measurement-period information could change the purchase-price allocation. Equinix has future call and put arrangements with Riverwood, including potential purchase obligations beginning in 2014.
- Property, plant and equipment, net, increased to $3.122bn from $2.651bn, reflecting expansion and acquisition activity. Nine-month depreciation was $240.1m, versus $175.4m in 2010.
Outlook, risks and contingencies
- Management expects revenue to benefit from customer growth and expansions in the Americas, EMEA and Asia-Pacific, including projects expected to open during 2011 and 2012. It did not provide specific revenue or earnings guidance.
- Management expects expansion-related operating expenses to rise in absolute dollars, continued investment in sales and marketing, and higher interest expense. It expects long-term operating expenses as a percentage of revenue generally to decline, while noting that new facilities may pressure margins before they generate meaningful revenue.
- Utilization, excluding ALOG, was 81%, compared with approximately 73% a year earlier; excluding centers open for less than four full quarters, utilization was approximately 86%. Management cautioned that available power and cooling, not physical cabinet space alone, can constrain usable capacity and growth.
- Expansion commitments include $221.3m of unaccrued capital expenditures, plus an estimated additional $400m–$450m of non-contractual capital expenditures to complete current projects. An October 2011 Seattle lease carries approximately $110m of cumulative rent obligations, with payments expected to begin after construction, estimated in 2013.
- Key risks include substantial debt and fixed lease commitments, access to additional financing, customer payment and churn risks, power availability and electricity costs, construction and utilization risk, foreign-exchange volatility, competition, and the operational reliability and security of data centers. The company also highlighted possible cost effects of environmental and climate regulations.
- Three groups of litigation were disclosed: an appeal concerning the settlement of IPO-related litigation; the Pihana litigation, in which claims were dismissed but an appeal remained pending; and a securities class action plus related shareholder derivative actions filed in 2011. Equinix said it could not estimate a loss range and had not accrued amounts because it did not consider an unfavorable outcome probable.
- Other items include $16.4m of accrued liabilities for uncertain tax positions and $89.7m of restricted cash posted in connection with the Paris 4 project. Management said available resources and expected operating cash flow should fund current requirements and announced expansions, but additional projects could require financing.
Most important facts for investors to verify
- Whether revenue and utilization growth is organic and sustainable, separately from acquisition contributions, foreign-exchange effects and recently opened facilities.
- The effect of ALOG’s non-controlling interests, redemption provisions and future put/call options on Equinix-attributable earnings, EPS and potential cash needs.
- The 2012 maturity and intended repayment or refinancing of the $250m convertible notes, alongside the company’s broader debt service and lease obligations.
- Actual capital spending, facility opening schedules, power capacity and customer demand compared with the substantial stated and expected expansion commitments.
- Trends in operating cash conversion, customer collections, electricity costs, foreign exchange and the status of the disclosed litigation and contingencies.