Equinix, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results. Equinix operates a global, carrier-neutral data center, interconnection and edge-services platform and is taxed as a REIT. At year-end, it operated 204 IBX data centers in 53 markets; the company describes its expanded footprint, including xScale facilities, as 210 facilities across 55 markets.
Financial results and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $5.562 billion | $5.072 billion | +10% |
| Income from operations | $1.170 billion | $977.4 million | +20% |
| Net income attributable to Equinix | $507.5 million | $365.4 million | +39% |
| Diluted EPS | $5.99 | $4.56 | +31% |
| Adjusted EBITDA (non-GAAP) | $2.688 billion | $2.413 billion | +11% |
| AFFO (non-GAAP) | $1.931 billion | $1.659 billion | +16% |
Calculated from reported figures, gross margin was approximately 49.5% and operating margin approximately 21.0% in 2019. Recurring revenue was $5.238 billion, or 94% of total revenue, up 10%; non-recurring revenue was 6%. By region, reported revenue grew 4% in the Americas, 16% in EMEA and 14% in Asia-Pacific. EMEA growth included $110.6 million of net realized cash-flow hedge gains.
Fourth quarter: Revenue was $1.417 billion versus $1.310 billion a year earlier; gross profit was $691.5 million versus $639.1 million. Net income attributable to Equinix was $125.0 million versus $110.0 million, and diluted EPS was $1.46 versus $1.36.
Cash flow and investment: Operating cash flow was $1.993 billion, compared with $1.815 billion in 2018. Investing cash flow was negative $1.945 billion, including $2.080 billion of purchases of other property, plant and equipment. Financing cash flow was positive $1.202 billion. Dividends paid were $836.2 million; 2019 declared dividends totaled $9.84 per share.
Debt and liquidity: Gross indebtedness, including finance leases, was approximately $11.9 billion; senior notes principal was $9.029 billion and mortgage and loans payable principal was $1.372 billion. Operating lease liabilities were $1.461 billion at year-end. Cash, cash equivalents and short-term investments totaled $1.880 billion, and approximately $1.9 billion was available under the $2.0 billion revolving facility. Stockholders’ equity was $8.840 billion. The filing says the company expects available cash and operating cash generation to cover operating needs, debt payments, dividends and announced expansion projects.
Material changes and notable items
- Revenue increased 10%, with growth across all regions; recurring revenue remained 94% of total. Cabinet utilization was approximately 79% at year-end versus 81% in 2018, or approximately 82% excluding expansions opened in the preceding 12 months.
- Capital spending remained elevated: purchases of other property, plant and equipment were $2.080 billion, near 2018’s $2.096 billion. Management expected 2020 IBX expansion construction activity to increase from 2019 levels.
- Equinix and GIC formed a European xScale joint venture. Equinix sold facilities and development interests for $433.0 million in stated consideration, including $351.8 million net cash, a 20% joint-venture interest and contingent consideration. The company recorded a $45.1 million gain and an obligation of $41.4 million for future construction.
- In November, Equinix issued $2.8 billion of senior notes at a weighted-average interest rate of 2.93% and tendered or redeemed approximately $1.9 billion of older notes with a weighted-average rate of 5.47%. It recorded a $52.8 million debt-extinguishment loss. Interest expense declined to $479.7 million from $521.5 million.
- Equinix raised $1.213 billion net through a March public share offering and $447.5 million net through its ATM program, increasing shares outstanding. It also recorded $15.8 million of impairment charges related primarily to the NY12 data center, which was sold in October.
- Adoption of lease accounting standard Topic 842 in 2019 added operating lease right-of-use assets and liabilities to the balance sheet; comparative periods were not restated. The effective income tax rate rose to 26.8% from 15.6%, primarily because of a valuation-allowance release in 2018.
Outlook, risks and contingencies
Management provided no specific revenue, earnings or cash-flow guidance in the supplied filing text. It expects continued investment in data center expansion and higher costs as the business grows; 2020 construction activity was expected to increase. The filing lists approximately $2.163 billion of total capex for significant expansion projects under construction at year-end, with estimates subject to change. Equinix had $795.0 million of unaccrued capital commitments and $988.2 million of other purchase commitments at year-end, in addition to lease commitments not yet commenced.
- Operating and growth risks: Power availability, rising electricity costs, construction delays and permitting constraints may limit capacity or delay openings. Amsterdam was experiencing permitting delays. Older facilities may face power constraints as customer density rises.
- Financial risks: Significant debt, lease obligations, dividends and expansion needs could constrain flexibility or increase reliance on financing. Variable-rate borrowing, refinancing conditions, foreign exchange movements and the LIBOR transition are additional exposures.
- Business risks: Demand may not support expansion returns; competition, customer churn, long sales cycles and acquisition integration could affect growth and margins. The company noted early vendor and supplier delays in China associated with the COVID-19 outbreak and uncertainty about its eventual business impact.
- REIT, tax and legal matters: Maintaining REIT qualification requires continuing compliance with complex tests and distributions. Tax audits and uncertain tax positions could lead to additional liabilities; accrued uncertain tax positions were approximately $132.2 million. A pending Italian environmental proceeding had stated maximum exposure of €380,000 before a potential reduction under a compliance program; management expected no material consolidated financial effect if decided adversely.
- Unusual estimates and accounting: The auditor identified REIT asset-test valuations as a critical audit matter because fair values rely on discounted cash flow estimates and assumptions including revenue growth, margins, capital spending and discount rates. The auditor gave an unqualified opinion on the financial statements and internal control; management also reported effective controls as of year-end.
Important facts for investors to verify
- How much of revenue and EBITDA growth reflects underlying customer demand versus acquisitions, currency hedges and other non-organic effects.
- Whether new capacity can be leased and powered at returns sufficient to justify the company’s approximately $2.1 billion annual PP&E purchases and substantial committed expansion pipeline.
- Debt maturities, lease obligations, refinancing access and the capacity to fund expansion and REIT distributions without further dilution.
- Performance, contingent payments and construction obligations under the GIC xScale joint venture, and the status and integration costs of the announced Packet acquisition and completed Mexico acquisition.
- The effects of COVID-19-related supplier and construction delays, power constraints, tax examinations and ongoing REIT qualification requirements.