Equinix, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Equinix operates global colocation data centers and provides interconnection and managed infrastructure services. More than 90% of revenue is recurring. The company reports Americas, EMEA and Asia-Pacific segments.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1.216 billion | $949.5 million | +28% reported; +22% constant currency |
| Operating income | $225.9 million | $167.2 million | +35% |
| Operating margin | 18.6% | 17.6% | +1.0 percentage point |
| Net income | $62.9 million | $42.1 million | +49% |
| Diluted EPS | $0.79 | $0.57 | +$0.22 |
| Adjusted EBITDA (non-GAAP) | $579.5 million | $427.6 million | +36% |
| AFFO (non-GAAP) | $414.6 million | $304.1 million | +36% |
| Operating cash flow | $300.9 million | $247.4 million | +22% |
| Capital expenditures | $349.7 million | $277.2 million | +26% |
Operating cash flow less reported capital expenditures was negative $48.8 million, versus negative $29.9 million in Q1 2017. Cash and cash equivalents were $2.024 billion at quarter-end; cash, cash equivalents and investments totaled approximately $2.063 billion. Total indebtedness was approximately $11.2 billion gross, including senior notes, loans and financing obligations. The $2.0 billion revolving facility had approximately $1.9 billion available after outstanding letters of credit.
Recurring revenue was $1.151 billion (95% of total), up 28%; non-recurring revenue was $65.2 million (5%), also up 28%. Segment revenue: Americas $602.6 million, EMEA $379.6 million and Asia-Pacific $233.6 million. The company reported a $21.5 million debt-extinguishment loss, primarily from settling financing obligations after purchasing the Stockholm 2 data-center land and building. Interest expense was $126.3 million, up from $111.7 million.
Material changes and comparability
- Growth reflected organic demand and opened or expanded data centers, as well as acquisitions. Q1 2018 included $134.8 million of Verizon-acquired business revenue; Q1 2017 did not include the Verizon acquisition, completed in May 2017. Recent Itconic, Zenium and IO UK operations contributed $19.7 million in Q1 2018.
- Foreign exchange materially aided reported international growth: management cited favorable EMEA revenue impact of approximately $45.6 million and Asia-Pacific impact of $9.8 million. Total revenue growth was 22% on a constant-currency basis.
- Cost of revenue rose 33%, faster than revenue, and was 51% of revenue versus 49%. Depreciation, expansion activity, utilities and acquisition-related costs contributed. Sales and marketing rose 24%; general and administrative expense rose 12%.
- Equinix adopted ASC 606 on January 1, 2018 using the modified retrospective method, increasing opening retained earnings by $269.8 million. Prior-year results were not restated. Under ASC 606, installation revenue is recognized over contract terms and certain contract-acquisition costs are capitalized and amortized. The company disclosed Q1 revenue would have been $3.8 million lower and net income $5.8 million lower without adoption; reported GAAP comparisons therefore include an accounting-policy change.
Outlook, risks and notable items
- No numerical full-year revenue or earnings guidance is provided in the filing. Management expects operating costs and expenses to rise with growth, anticipates higher interest expense from additional debt, and expects acquisition costs to increase during 2018.
- Management said it believed cash, operating cash generation and available revolving credit were sufficient for operating needs, current expansion projects and regular dividends. It also cautioned that further expansion or acquisitions may require additional debt or equity financing.
- At March 31, remaining performance obligations were approximately $5.6 billion, the majority expected to be recognized over the next 24 months. Management reported approximately 80% utilization excluding recently acquired Itconic and Zenium; excluding recent openings and those acquisitions, utilization would have been approximately 83%.
- After quarter-end, Equinix acquired Infomart Dallas on April 2 for approximately $781 million, including $31 million cash and $750 million of 5.00% senior notes. It acquired Australia’s Metronode on April 18 for A$1.035 billion (approximately $805.6 million). Purchase-price allocations were not complete. These acquisitions expand the platform but add integration, financing and execution demands.
- CEO Steve Smith resigned in January 2018; Executive Chairman Peter Van Camp was serving as interim CEO. The company said it intended to appoint a permanent CEO.
- Key risks include substantial debt and lease commitments, power availability and cost, capacity constraints, foreign-exchange exposure, acquisition integration, customer demand and churn, cyber and physical outages, REIT qualification and distribution requirements, tax-law changes, and ongoing back-office systems work. The filing reported no legal proceedings and management concluded disclosure controls were effective.
- Quarterly cash dividends were $2.28 per share; a further $2.28 dividend was declared for payment in June 2018. The company reported approximately $0.7 billion of unaccrued capital expenditure commitments and $0.9 billion of other purchase commitments at quarter-end.
Most important facts for investors to verify
- How much of revenue and EBITDA growth is organic versus acquisition-related and foreign-exchange-driven, and how ASC 606 affects period comparisons.
- Whether expansion spending, utilization and power availability support expected returns, particularly as capital expenditures exceeded operating cash flow in Q1.
- Debt service, lease obligations, post-quarter acquisition financing and the company’s ability to fund growth and dividends without materially increasing leverage or issuing equity.
- Progress integrating Verizon and the newer acquisitions, the permanent CEO search, and the potential effects on costs, operations and customer retention.
- REIT compliance and the effects of tax-law changes, including the company’s ongoing assessment of the TCJA and interest-deduction limitations.