Equinix, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 30, 2019; comparisons are with the quarter and six months ended June 30, 2018 unless otherwise stated. Equinix operates global data centers, providing colocation, interconnection and managed infrastructure services across Americas, EMEA and Asia-Pacific.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $1.385B | $1.262B | $2.748B | $2.478B |
| Operating income | $291.8M | $215.0M | $571.3M | $440.9M |
| Net income attributable to Equinix | $143.5M | $67.6M | $261.6M | $130.5M |
| Diluted EPS | $1.69 | $0.85 | $3.13 | $1.64 |
| Adjusted EBITDA (non-GAAP) | $677.0M | $604.0M | $1.337B | $1.184B |
| Operating cash flow | Not separately stated | Not separately stated | $964.1M | $839.6M |
- Q2 revenue increased 10% reported and 13% on a constant-currency basis; recurring revenue was 94% of the total. Six-month revenue rose 11% reported and 14% constant currency.
- Q2 operating margin was approximately 21.1%, versus 17.0%; net margin was approximately 10.4%, versus 5.4%. Cost of revenues was 50% of revenue, compared with 52%.
- Q2 adjusted EBITDA increased 12% reported and 15% constant currency. Six-month adjusted EBITDA increased 13% reported and 17% constant currency. These are non-GAAP measures.
- Six-month investing cash outflow was $901.6M, including $808.1M of capital expenditures; financing cash inflow was $946.8M. Cash, cash equivalents and short-term investments totaled $1.631B at June 30.
- At June 30, gross debt principal was approximately $9.672B, comprising $8.326B of senior notes and $1.346B of mortgages and loans. Finance lease liabilities were $1.202B and operating lease liabilities $1.465B. Management reported total indebtedness and financing obligations of approximately $10.9B.
- The company reported $8.749B of stockholders’ equity and approximately $1.9B of remaining availability under its $2.0B revolving facility, net of letters of credit. Current liabilities were $1.884B versus current assets of $2.989B.
Material changes versus prior period
- Growth reflected organic customer demand and capacity opened through data-center expansions, particularly in EMEA and Asia-Pacific. Q2 EMEA revenue grew 17% reported (24% constant currency); Asia-Pacific grew 12% (15% constant currency); Americas grew 4% (5% constant currency).
- Income from operations grew 36% in Q2. Lower acquisition costs compared with 2018 contributed to the improvement; Q2 2018 included $30.4M of acquisition costs and a $19.2M debt-extinguishment loss. Six-month 2019 results also included $14.8M of impairment charges, principally related to the NY12 data center held for sale.
- Six-month net income more than doubled year over year, while the effective tax rate rose to 25.6% from 15.0%. Management attributed the comparison primarily to a one-time tax benefit from a 2018 legal-entity reorganization.
- Operating cash flow increased by $124.4M year over year for the first six months. Investing outflow was substantially lower than 2018, when acquisitions required approximately $831M; 2019 capital spending remained significant.
- Equinix adopted the new lease standard on January 1, 2019 without restating comparative periods. The adoption added operating lease right-of-use assets and liabilities and changed classification of certain lease arrangements; this limits direct balance-sheet comparisons with 2018.
- Equity issuance generated approximately $1.213B net in a March public offering and $348.2M net through the ATM program during the first half. Shares outstanding increased to approximately 84.8M at August 1, 2019 from approximately 80.7M at year-end 2018.
Outlook, commentary and risks
- No specific full-year revenue, earnings or cash-flow guidance is stated in the provided filing text. Management expects expansion construction activity to increase from 2018 levels and expects operating expenses to rise as the business grows.
- Management cited recurring revenues, ongoing customer orders and its global platform as growth drivers. Recurring revenue was 94% of Q2 revenue; approximately $7.6B of remaining performance obligations were expected to be recognized in future periods, mostly over the next 24 months.
- Cabinet utilization was approximately 81% at June 30, 2019; excluding the effect of data centers opened in the preceding 12 months, management estimated approximately 84%. Power capacity, rather than physical space, can constrain usable capacity and growth.
- In June, Equinix agreed to form a European xScale data-center joint venture with GIC, retaining 20% while GIC would own 80%. Equinix agreed to sell London 10 and Paris 8 data centers and certain development and leases to the venture. Closing was expected in Q3 2019, subject to regulatory approval, customer consents, financing and other conditions.
- Foreign-exchange movements reduced reported revenue growth; management cited an unfavorable Q2 impact of approximately $24M in EMEA, $8.1M in Asia-Pacific and $4.7M in the Americas. Hedging reduces, but does not eliminate, currency exposure.
- Key risks include substantial debt and lease commitments, high expansion and utility costs, power availability and capacity constraints, customer demand and collections, foreign-exchange exposure, construction delays, cyber and physical disruptions, and continued REIT qualification. The filing also describes an ongoing Italian environmental proceeding; the company said an adverse outcome was not expected to materially affect consolidated financial position.
- The board declared a quarterly dividend of $2.46 per share on July 31, payable September 18, 2019. Management stated that it believed available cash, operating cash generation and financing sources were sufficient for operating needs, debt payments, dividends and announced expansion projects.
Important facts for investors to verify
- Progress, closing conditions and proceeds or ongoing obligations associated with the GIC xScale joint venture and asset transfers.
- Whether revenue growth and utilization translate into returns adequate to support planned capital expenditures and the approximately $0.9B of unaccrued committed capital spending disclosed at June 30.
- Debt maturities, financing costs, revolving-facility availability and the effect of lease obligations on liquidity and leverage.
- Future dilution from equity financing and the relationship between dividends, REIT distribution requirements and cash available for expansion.
- Currency, electricity-price and power-capacity trends, plus the status and financial exposure of the NY12 sale and Italian proceeding.