Equinix, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Equinix operates a global data-center, colocation, interconnection and related services platform. Results are unaudited; amounts below are in millions of U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1,519.8 | $1,396.8 | $4,434.4 | $4,145.0 |
| Recurring revenue | $1,432.1 | $1,319.3 | $4,191.9 | $3,900.2 |
| Income from operations | $288.4 | $285.4 | $824.3 | $856.7 |
| Net income attributable to Equinix | $66.7 | $120.9 | $318.8 | $382.5 |
| Diluted EPS | $0.74 | $1.41 | $3.63 | $4.54 |
| Adjusted EBITDA (non-GAAP) | $737.2 | $674.7 | $2,141.5 | $2,011.9 |
| Adjusted EBITDA margin | 48.5% | 48.3% | 48.3% | 48.5% |
Revenue grew 9% year over year in Q3 and 7% for the nine-month period; recurring revenue represented 95% of Q3 revenue and 94% year to date. Operating margin was approximately 19.0% in Q3 versus 20.4% a year earlier, and 18.6% year to date versus 20.7%. Profit fell despite revenue growth, principally reflecting higher operating costs and debt-extinguishment losses.
- Cash flow: Nine-month operating cash flow was $1,623.7, compared with $1,463.1 in 2019. Investing cash outflow was $2,087.2, including $1,448.2 of capital expenditures and $478.2 for acquisitions. Financing cash inflow was $1,237.4. Cash, cash equivalents and restricted cash ended at $2,666.1.
- Liquidity: At September 30, cash and cash equivalents were $2,645.0, with $14.2 of short-term investments. Approximately $1.9 billion was available under the $2.0 billion revolving facility; $74.1 million of letters of credit was outstanding.
- Debt and leases: Gross debt and finance-lease obligations totaled about $12.4 billion, including $9.3 billion principal of senior notes, $1.3 billion of mortgage and loan principal, and approximately $1.8 billion of finance-lease liabilities. Operating-lease liabilities were $1.4 billion. Senior notes current portion was $2,044.0; the filing’s debt maturity schedule shows approximately $1,928.4 due in the remaining months of 2020, primarily Infomart notes.
Material changes versus prior period
- Q3 revenue increased 9%; EMEA grew 13% and Asia-Pacific 12%, while Americas grew 4%. For the nine months, revenue grew 7%, led by EMEA (+11%) and Asia-Pacific (+10%). Management attributed growth to customer orders, organic expansion and recently opened or expanded data centers; acquisitions contributed to Americas revenue.
- Q3 operating income was nearly flat, while nine-month operating income declined 4%. Americas operating income fell 43% in Q3 and 44% year to date, with higher compensation, consulting, office and depreciation costs. EMEA operating income rose 31% in Q3 and 27% year to date.
- Q3 net income attributable to Equinix declined 45% and nine-month net income declined 17%. The Q3 included a $93.5 million debt-extinguishment loss; the nine-month period included $101.8 million of such losses. Lower interest expense partly offset the impact.
- Operating cash flow improved year over year, while capital spending, acquisitions and real-estate purchases drove higher investing outflows. The company raised $1,683.1 million net through a May public stock offering and issued $2.6 billion of senior notes in June, while redeeming higher-coupon debt.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific numerical revenue or earnings guidance. Management expects data-center expansion spending to be similar to or above 2019 levels and anticipates operating costs to rise as the business expands. It stated that available cash, operating cash flow and financing access should fund operating needs, dividends and announced projects.
- Capacity and investment: Cabinet utilization was approximately 79%, compared with 81% a year earlier; excluding recently opened expansion capacity, management estimated utilization at approximately 81%. Power and cooling constraints could limit usable capacity and growth. The company had about $1.1 billion of unaccrued capital-expenditure commitments and $1.2 billion of other purchase commitments.
- COVID-19: Management reported no material financial-statement impact through September 30; Smart Hands revenue was affected by temporary fee waivers, and $8.6 million of one-time employee bonuses and work-from-home support costs were recorded in Q1. Data centers remained operational, but the ultimate pandemic impact was uncertain; construction, supply-chain, customer payment and demand risks remain.
- Acquisitions and joint ventures: Packet Host and three Axtel data centers were acquired in 2020 for combined consideration of about $479 million. Their combined operations contributed $34.9 million of nine-month revenue and a $27.8 million operating loss, including Packet-related accelerated stock compensation. Bell’s Canadian data-center acquisition closed October 1, after quarter-end; one Ottawa site remained pending. The approximately $161 million GPX India acquisition was expected to close in Q1 2021, subject to conditions. Asia-Pacific xScale sites were classified as held for sale, with a $7.3 million impairment; the transaction was expected to close in Q4 2020 subject to approvals.
- Capital allocation and debt: A $2.66-per-share quarterly dividend was declared after quarter-end. In October, Equinix issued $1.85 billion of notes and redeemed additional euro-denominated notes, recording a $44.2 million extinguishment loss. A new at-the-market program of up to $1.5 billion was established October 30; no shares had been sold under it as of filing.
- Other risks and contingencies: Foreign-exchange volatility, substantial debt and lease commitments, interest-rate and refinancing exposure, REIT qualification and distribution requirements, construction execution, power availability, acquisitions and joint-venture execution are material risks. Tax audits and appeals, including in Brazil and France, could result in additional liabilities; uncertain-tax-position accruals were about $156 million. An Italian environmental proceeding remained pending; management did not expect an adverse outcome to materially affect consolidated financial position.
- Cyber incident: Equinix disclosed ransomware discovered on certain internal systems in September 2020. It reported that data centers and services remained operational, the investigation was closed October 14, and no material disruption or costs resulted; future cybersecurity incidents remain a risk.
Most important facts for investors to verify
- Whether recurring revenue, customer bookings and regional growth continue to offset rising depreciation, compensation and other operating expenses.
- How cash generation compares with the company’s substantial capital commitments, debt maturities, lease obligations and dividend requirements.
- Whether the Bell and GPX India transactions, Asia-Pacific xScale sale and other expansion plans close on expected terms and deliver anticipated returns.
- Whether COVID-19, construction delays, power constraints or customer payment deterioration materially affect capacity, collections or growth.
- Potential effects of foreign exchange, tax audits and REIT compliance, as well as any developments from the ransomware incident or legal proceedings.