Equinix, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unless otherwise stated, financial amounts below are in U.S. dollars; “Q2” means the three-month period. Equinix operates a global data-center, colocation, interconnection and edge-services platform, with 214 IBX and xScale data centers across 56 markets.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $1,470.1 million | $1,385.0 million | $2,914.7 million | $2,748.2 million |
| Income from operations | $282.5 million | $291.8 million | $536.0 million | $571.3 million |
| Net income attributable to Equinix | $133.3 million | $143.5 million | $252.1 million | $261.6 million |
| Diluted EPS | $1.52 | $1.69 | $2.90 | $3.13 |
| Adjusted EBITDA (non-GAAP) | $720.0 million | $677.0 million | $1,404.3 million | $1,337.2 million |
| AFFO attributable to common shareholders (non-GAAP) | $557.8 million | $497.6 million | $1,092.5 million | $985.8 million |
- Q2 revenue grew 6% year over year (8% constant currency); recurring revenue rose 7% and represented 95% of revenue. For the first half, revenue grew 6% (8% constant currency), with recurring revenue up 7%.
- Calculated Q2 gross margin was approximately 49.7% versus 49.6%; operating margin was 19.2% versus 21.1%, and net margin was 9.1% versus 10.4%. First-half operating margin was approximately 18.4% versus 20.8%.
- Q2 operating income declined 3% and net income attributable to Equinix declined 7%; first-half operating income and attributable net income fell 6% and 4%, respectively. Adjusted EBITDA increased 6% in Q2 and 5% in the first half; AFFO increased 12% and 11%, respectively. Adjusted EBITDA and AFFO are non-GAAP measures defined by the company.
- For the six months, operating cash flow was $1,091.5 million, investing cash outflow was $1,484.0 million, and financing cash inflow was $3,325.9 million. Capital expenditures were $882.9 million; acquisitions used $478.2 million. Dividends and special distributions paid were $469.5 million.
- At June 30, cash and cash equivalents were $4,785.1 million, with $22.1 million of short-term investments. Total assets were $27,792.6 million and stockholders’ equity was $10,388.3 million. The company reported approximately $14.2 billion of total indebtedness including finance lease obligations, and $1.9 billion available under its revolving facility.
- Gross senior-note principal was $11.1 billion and gross mortgage and loan principal was approximately $1.3 billion. Current liabilities included $2.2 billion of current senior notes. After the July 2020 redemptions described below, the company estimated cash, cash equivalents and short-term investments would be approximately $2.7 billion.
Changes versus the prior comparable period
- Revenue growth was led by EMEA, up 8% in Q2 (11% constant currency), and Asia-Pacific, up 10% (12% constant currency); Americas revenue rose 3% (5% constant currency). EMEA and Asia-Pacific adjusted EBITDA increased 16% and 10%, while Americas adjusted EBITDA declined 2%.
- Operating expenses increased faster than revenue: Q2 cost of revenue rose 6%, sales and marketing 12%, and general and administrative expense 10%. First-half general and administrative expense increased 16%, with higher compensation, consulting, systems depreciation and acquisition-related costs contributing.
- Revenue growth reflected organic customer demand, data-center expansions and acquisitions. First-half results included $21.5 million of revenue from Packet and Axtel combined; their combined operations recorded a $20.3 million net loss, primarily reflecting $16.1 million of accelerated Packet equity-award compensation.
- Q2 interest expense fell to $108.5 million from $120.5 million; first-half interest expense fell to $215.8 million from $243.4 million. Lower interest income and foreign-exchange movements also affected period comparisons.
Outlook, commentary, risks and unusual items
- Guidance: The filing does not provide formal numerical revenue or earnings guidance. Management expects cost of revenue, sales and marketing, and general and administrative expenses to rise as the business grows; data-center expansion activity was expected to be similar to or greater than 2019 levels.
- COVID-19: Management reported no material financial-statement impact in the first half, but waived some Smart Hands fees, recorded an additional $6.3 million allowance for doubtful accounts, and incurred $8.6 million of one-time employee bonuses and compensation. Data centers remained operational; some construction delays were described as insignificant at filing, while the ultimate effects on customers, collections, suppliers and project schedules remained uncertain.
- Expansion and transactions: Equinix acquired Packet for approximately $290.3 million and three Axtel data centers in Mexico for approximately $189.0 million. It agreed to acquire 13 Canadian data-center sites from Bell for approximately $750 million, with closing expected in Q4 2020 subject to conditions. A proposed GIC Asia-Pacific xScale joint venture, including planned transfers of three Japanese development sites, was also expected to close in Q4, subject to approvals and other conditions.
- Debt refinancing: In June, Equinix issued $2.6 billion of notes due 2025, 2027, 2030 and 2050 at stated coupons of 1.250%, 1.800%, 2.150% and 3.000%. In July, it redeemed €750 million of 2.875% notes due 2024 and $1.1 billion of 5.875% notes due 2026, recording a subsequent-event debt-extinguishment loss of $93.5 million, including a $77.8 million cash redemption premium.
- Capital commitments and capacity: The company had approximately $1.1 billion of unaccrued capital-expenditure commitments and $1.1 billion of other purchase commitments. Cabinet utilization was approximately 79%, versus 81% a year earlier (approximately 81% excluding expansions opened in the prior 12 months). Management cautioned that power and cooling capacity can constrain usable space and growth.
- Other risks and contingencies: Key exposures include pandemic-related disruption, construction and permitting delays, customer credit and churn, power availability and costs, foreign-exchange movements, substantial debt and lease obligations, REIT qualification and distribution requirements, and tax audits and assessments. The company disclosed a pending Italian environmental proceeding; it expected no material consolidated financial effect if adverse. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether recurring-revenue growth and customer demand persist, and how utilization, power availability and new capacity affect future growth and margins.
- Whether COVID-19 leads to further customer payment delays, bad-debt provisions, waived service revenue, or construction and supply-chain disruption.
- Closing conditions, timing, funding and expected returns for the Bell acquisition and Asia-Pacific xScale joint venture.
- The impact of the July note redemptions on cash, interest expense, debt maturities and leverage, including the $93.5 million subsequent-event extinguishment loss.
- How the company funds its sizable capital commitments, dividends, acquisitions and lease obligations while maintaining liquidity and REIT compliance.