Equinix, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Equinix operates global data centers, providing colocation, interconnection and managed infrastructure services. The company reported 202 IBX data centers across 52 markets.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $1.363 billion | $1.216 billion | +12% reported; +16% constant currency |
| Operating income | $279.5 million | $225.9 million | +24% |
| Net income attributable to Equinix | $118.1 million | $62.9 million | +88% |
| Diluted EPS | $1.44 | $0.79 | +$0.65 |
| Adjusted EBITDA | $660.2 million | $579.5 million | +14% reported; +18% constant currency |
| AFFO attributable to common shareholders | $488.1 million | $414.6 million | +18% |
| Operating cash flow | $421.1 million | $300.9 million | +$120.2 million |
| Capital expenditures | $364.0 million | $349.7 million | +$14.2 million |
Recurring revenue was $1.275 billion, or 93% of total revenue, versus 95% a year earlier. Cost of revenues was $682.0 million; gross margin on this basis was approximately 50%, compared with 49% in Q1 2018. Operating margin was approximately 20.5%, versus 18.6%; net margin attributable to Equinix was approximately 8.7%, versus 5.2%.
Growth was strongest in Asia-Pacific (+22% reported), followed by EMEA (+14%) and the Americas (+7%). Results included approximately $27.2 million of revenue from the 2018 Metronode and Infomart Dallas acquisitions. Adjusted EBITDA rose in all three regions.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.634 billion; short-term investments were $13.8 million, for combined cash and investments of $1.648 billion.
- Total liabilities were $14.066 billion and stockholders’ equity was $8.425 billion. Debt and finance lease obligations totaled approximately $11.0 billion on the company’s stated basis; operating lease liabilities were a further $1.449 billion on the balance sheet.
- The company had approximately $1.9 billion of additional availability under its $2.0 billion revolving facility, net of outstanding letters of credit.
- In March, Equinix issued 2,985,575 common shares and received net proceeds of approximately $1.213 billion. This equity raise drove much of the quarter’s $1.028 billion increase in cash, cash equivalents and restricted cash.
Material changes and unusual items
- Equinix adopted the new lease accounting standard on January 1, 2019. It recognized operating lease right-of-use assets of $1.469 billion at adoption and lease liabilities; comparative periods were not restated, so some balance-sheet and expense comparisons are affected by the accounting change.
- A $14.4 million impairment charge was recorded for the New York 12 data center, classified as held for sale following a January sale agreement. The impairment reduced Americas operating income.
- Interest expense declined to $122.8 million from $126.3 million, partly reflecting lease accounting changes and cross-currency interest rate swaps. Income tax expense increased to $42.6 million from $16.8 million; the effective tax rate was 26.6% versus 21.0%.
- Foreign exchange movements reduced reported international revenue; management cited unfavorable currency impacts in each region, particularly EMEA. The company uses hedges but stated they do not eliminate currency exposure.
- After quarter-end, Equinix completed the approximately $34.3 million acquisition of the AMS1 data center business in Amsterdam on April 18, 2019. It also declared a $2.46-per-share quarterly dividend, payable June 19, 2019.
Outlook, management commentary and risks
The filing provides no numerical revenue or earnings guidance. Management expects continued growth in operating costs and investment alongside expansion, and anticipates IBX construction activity to increase from 2018 levels. It expects to fund planned operations, dividends and announced expansion projects with existing resources and operating cash flow, while noting that additional debt or equity financing may be needed for further expansion or acquisitions. Management reported cabinet utilization of approximately 80%; excluding data centers opened in the prior 12 months, utilization would have been approximately 83%. Power availability, not just physical cabinet capacity, can constrain usable capacity and growth.
Key disclosed risks include substantial debt and lease obligations, large expansion commitments, electricity cost and availability, construction delays or cost overruns, foreign currency exposure, acquisition integration, customer demand and collections, and maintaining REIT qualification and required distributions. The company cited approximately $801 million of unaccrued capital expenditure commitments and $890 million of other purchase commitments, as well as $274 million of leases not yet commenced. It also disclosed approximately $114.9 million of accrued liabilities for uncertain tax positions. Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether recurring revenue, regional growth and utilization support the planned pace of data-center expansion, particularly where power capacity is constrained.
- How the $1.213 billion equity proceeds, future capital spending and dividend requirements affect per-share returns, liquidity and potential additional dilution.
- Debt maturities, financing costs and total lease commitments, including the effect of the newly adopted lease standard on comparisons.
- The eventual sale proceeds and final accounting for NY12, and the performance and integration of acquired facilities, including AMS1.
- Exposure to currency movements, electricity costs and availability, tax assessments, and continued REIT compliance.