Equinix, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Financial statements are unaudited. Equinix operates data centers offering colocation, interconnection and managed infrastructure services. Results include Switch & Data from May 1, following the April 30 acquisition.
Financial performance and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $296.1 | $213.2 | $544.7 | $412.4 |
| Income from operations | $40.2 | $41.0 | $88.2 | $84.7 |
| Operating margin | 13.6% | 19.2% | 16.2% | 20.5% |
| Net income (loss) | $(2.3) | $17.4 | $11.9 | $32.9 |
| Diluted EPS | $(0.05) | $0.44 | $0.28 | $0.84 |
| Adjusted EBITDA (non-GAAP) | $132.2 | $99.5 | $249.4 | $190.9 |
- Revenue increased 39% year over year in Q2 and 32% in the first half. Recurring revenue was 95% of total revenue in both periods.
- Q2 operating income was nearly flat despite revenue growth; operating margin declined to 13.6%. Higher interest expense, acquisition and restructuring costs, and operating expenses contributed to the Q2 net loss. Adjusted EBITDA rose 33% in Q2, but its margin was about 44.6%, versus 46.7% a year earlier.
- Six-month operating cash flow was $156.7, down from $165.4. Investing cash outflow was $359.0, including $292.1 of property and equipment purchases and $113.3 net cash paid for Switch & Data. Financing provided $377.6.
- At June 30, cash and cash equivalents were $511.3; short- and long-term investments were $210.6, for total cash and investments of about $722.0. Total current assets were $888.2 and current liabilities $299.6.
- Reported debt and financing obligations were $2,029.4 carrying value: $904.8 convertible debt, $750.0 senior notes, $167.4 mortgage and loans payable, and $207.3 capital lease and other financing obligations. Management described total indebtedness as approximately $2.1–$2.2 billion, depending on presentation of principal and discounts.
Material changes and management commentary
- Switch & Data added 34 U.S. and Canadian data centers and $37.6 of Q2 revenue; its May–June operations also recorded a $6.1 net loss. The acquisition consideration was approximately $699.9, including $549.4 in Equinix stock and $134.0 cash. The purchase allocation included $407.4 goodwill.
- Excluding Switch & Data, North American revenue increased 19% in Q2 and 19% in the first half. Management attributed organic growth to customer orders, selective price increases and recently opened or expanded facilities. Customer count rose to 3,661 from 2,430, largely due to the acquisition.
- Utilization was 74% including Switch & Data. Excluding the acquisition, it was 76%, compared with approximately 83% a year earlier; excluding expansions opened in the prior 12 months, management estimated 86%.
- Equinix issued $750.0 of 8.125% senior notes due 2018. It refinanced Asia-Pacific and Singapore facilities with a new multi-currency facility; $99.0 was drawn at an approximate 5.30% blended rate, with about $103.7 remaining available. Several other debt facilities were repaid or terminated. Interest expense rose to $37.6 in Q2 from $15.9.
- Capital investment and expansion remain substantial. Equinix cited $77.3 of contracted, unaccrued capital expenditures and estimated a further $150–$200 of non-contractual expansion spending for the rest of 2010. Management said existing liquidity and expected operating cash flow should cover announced expansions, while additional growth or acquisitions could require financing.
- Management expected continued revenue growth from existing and planned expansions, including facilities expected to open in 2010 and early 2011. It anticipated higher interest expense and additional Switch & Data restructuring charges through 2010 and into early 2011. The filing provides no formal numerical revenue or earnings guidance.
Risks, contingencies and unusual items
- Key risks include acquisition integration and returns, heavy debt and refinancing needs, access to additional capital, customer collections and churn, competition and pricing, foreign-currency movements, and power availability, cost and capacity. Management specifically cautioned that rising power demand per cabinet can constrain usable capacity even where physical space remains.
- The stronger U.S. dollar reduced reported foreign revenue and caused foreign currency translation losses. Further strengthening could continue to weigh on reported results.
- Q2 included $5.8 of acquisition costs and $4.4 of Switch & Data restructuring charges. The useful-life estimate change for certain fixed assets reduced Q2 depreciation by $3.9 and increased net income by $2.2, or $0.05 per share.
- Switch & Data merger litigation had a proposed settlement awaiting a scheduled August 9, 2010 final approval hearing; the contemplated attorneys’ fees were $0.9, with Equinix expected to pay a portion. A separate Pihana lawsuit had been dismissed, but plaintiffs appealed. The IPO litigation settlement also faced appeals. Management could not determine whether the unresolved litigation outcomes would materially affect results or financial condition.
- Other commitments include operating leases, power and purchase commitments, asset-retirement obligations and expansion costs. The filing describes possible added electricity costs and regulatory burdens associated with greenhouse-gas rules.
Most important facts for investors to verify
- How much of reported growth and customer-count increase reflects Switch & Data versus organic demand, and whether acquired operations deliver expected integration benefits.
- Whether utilization, power availability and new-center openings support management’s expected growth without weakening margins or returns on expansion spending.
- Cash generation after capital expenditures, the timing and amount of planned expansion spending, and availability of the remaining credit capacity.
- Debt maturities, interest costs, covenant compliance and refinancing requirements, including the $250.0 convertible notes due in 2012.
- Progress and financial exposure from the pending litigation, restructuring, foreign-exchange movements and electricity or environmental-cost risks.