Equinix, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Dollar amounts below are in millions unless otherwise noted. Equinix operates data centers and provides colocation, interconnection and managed infrastructure services across the Americas, EMEA and Asia-Pacific.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $605.2 | $528.9 | $1,185.2 | $1,045.0 |
| Income from operations | $124.7 | $116.0 | $246.3 | $220.8 |
| Net income (loss) attributable to Equinix | $11.3 | $(25.8) | $52.7 | $7.0 |
| Diluted EPS | $0.22 | $(0.52) | $1.04 | $0.14 |
| Adjusted EBITDA (non-GAAP) | $275.3 | $248.0 | $535.7 | $488.9 |
| Operating cash flow | — | — | $270.7 | $231.3 |
- Q2 revenue grew 14% reported (12% at constant currency); six-month revenue grew 13% reported (12% constant currency). Recurring revenue was 95% of revenue in both comparative periods.
- Q2 cost of revenue was $292.9 million, or 48% of revenue, versus $267.1 million, or 51%. Six-month cost of revenue was $580.4 million, or 49%, versus $525.7 million, or 50%.
- Adjusted EBITDA increased 11% in Q2 and 10% for the six months; at constant currency, growth was 7% in each period. It is a non-GAAP measure, not a substitute for GAAP results.
- Six-month capital expenditures were $265.7 million for property, plant and equipment; operating cash flow less that amount was approximately $5.0 million before other investing and financing activity.
- At June 30, cash and cash equivalents were $408.3 million and investments were $296.0 million, totaling $704.3 million, down from $1,030.1 million at year-end 2013. Total current assets were $954.5 million and current liabilities $563.3 million.
- Debt and financing obligations included $2.25 billion of senior notes, $336.7 million principal of convertible notes, $230.7 million of mortgage and loans payable, and $1.13 billion of capital lease and other financing obligations. The filing describes total indebtedness as approximately $4.0 billion. A further $513.7 million was available under the revolving credit line.
Material changes and notable items
- Revenue grew in all regions in Q2: Americas $342.3 million (+9%), EMEA $157.2 million (+24%) and Asia-Pacific $105.7 million (+20%). Management attributed growth to customer demand and recently opened or expanded data centers; currency materially boosted EMEA and reduced Americas and Asia-Pacific reported revenue.
- Customer count increased 8% year over year to approximately 6,093. Overall utilization was approximately 77%, unchanged year over year; excluding expansions opened in the prior 12 months, management said utilization would have been approximately 81%.
- Q2 included a $51.2 million loss on extinguishment of convertible debt, following exchanges of $217.2 million principal of 3.00% notes and $215.8 million principal of 4.75% notes. The comparable 2013 quarter included a $93.6 million extinguishment loss. These charges materially affect comparisons of GAAP earnings.
- During the six months, Equinix repurchased 1.32 million shares for $255.4 million. Convertible-note exchanges involved issuing shares and cash. A July 2014 follow-on repurchase cost $42.6 million.
- A prospective change in the estimated recognition period for installation-fee revenue reduced Q2 and six-month revenue and operating income by $1.8 million, net income by $1.3 million and EPS by $0.03.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance is provided. Management expects continued revenue growth as expansions open in 2014–2015 and expects adjusted EBITDA to improve with growth, while costs and spending are also expected to rise.
- Equinix was pursuing REIT status effective January 1, 2015, subject to a favorable IRS private letter ruling, internal actions and other conditions. Management estimated conversion costs of $75–$85 million, with $62.6 million incurred; depreciation and amortization recapture was expected to create $360–$380 million of federal and state tax liability, of which $254.7 million had been settled. Estimated 2014 cash taxes were $145–$180 million.
- Management estimated special distributions of $700 million–$1.1 billion, expected to be at least 80% stock and no more than 20% cash, with distributions anticipated in late 2014 and 2015. Amount and timing remained uncertain. A significant tax provision in 2014 was expected from reassessment of U.S. deferred tax assets and liabilities if conversion actions were sufficiently finalized.
- In July 2014, Equinix acquired the remaining ALOG interests for approximately $225 million cash, giving it full ownership; accounting for the transaction was not complete at filing. The filing also lists $267.2 million of unaccrued committed capital expenditures and estimates a further $110–$150 million of non-contractual expansion capital spending.
- Key risks include REIT approval, qualification and distribution funding; substantial debt and lease commitments; foreign-exchange exposure; power availability, costs and capacity constraints; customer demand and churn; data-center reliability and security; expansion execution and returns; and possible disruptions or added costs from back-office and financial-system upgrades. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Progress and final IRS ruling, timing, tax consequences, compliance costs and distribution terms for the proposed REIT conversion.
- Cash needs and funding after the ALOG purchase, share repurchases, planned distributions, debt maturities and committed expansion spending.
- Whether revenue and utilization gains persist as new capacity opens, particularly given power constraints and regional cost growth.
- Underlying earnings and cash generation apart from debt-extinguishment charges, currency effects and non-GAAP adjustments.
- Installation-fee revenue estimate and its future impact, as well as collection and working-capital trends.