Equinix, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Equinix operates global data centers and provides colocation, interconnection and managed infrastructure services. More than 90% of revenue is recurring. The company reported 200 IBX data centers across 52 markets after its 2018 acquisitions.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $1,261.9 million | $1,066.4 million | $2,477.8 million | $2,015.9 million |
| Operating income | $215.0 million | $184.9 million | $440.9 million | $352.1 million |
| Net income | $67.6 million | $45.8 million | $130.5 million | $87.9 million |
| Diluted EPS | $0.85 | $0.58 | $1.64 | $1.16 |
| Adjusted EBITDA (non-GAAP) | $604.0 million | $509.3 million | $1,183.5 million | $936.9 million |
| AFFO (non-GAAP) | $428.1 million | $360.1 million | $842.7 million | $664.2 million |
- Q2 revenue rose 18% year over year; adjusted EBITDA rose 19%. Revenue was 94% recurring, versus 95% a year earlier.
- Q2 operating margin was approximately 17.0%, compared with 17.3%; cost of revenue increased to 51.6% of revenue from 49.0%. Six-month operating margin was approximately 17.8%, versus 17.5%.
- Operating cash flow for the first half was $839.6 million, up from $553.8 million. Investing cash outflow was $1.730 billion, including $870.0 million of capital expenditures and approximately $831.0 million of acquisitions. Cash flow from operations less reported capital expenditures was approximately negative $30 million.
- Cash and cash equivalents were $966.3 million at June 30; cash, equivalents and investments totaled approximately $988.7 million. The company reported approximately $1.9 billion of additional availability under its $2.0 billion revolving facility, after letters of credit.
- Management reported total indebtedness of approximately $11.5 billion, including senior notes, mortgage and loans, and capital lease and other financing obligations. Interest expense for the first half was $261.0 million, up from $230.7 million. Declared dividends were $2.28 per share per quarter.
Changes versus comparable periods
- Growth reflected organic customer demand and opened expansions as well as acquisitions. Q2 included $54.6 million of incremental Americas revenue from the Verizon and Infomart Dallas businesses, $18.1 million from Itconic and Zenium, and $13.9 million from Metronode. Foreign exchange also affected reported growth, particularly in EMEA.
- Infomart Dallas was acquired for approximately $805.6 million, substantially paid through $758.2 million fair value of 5% senior notes. Metronode was acquired for approximately $804.2 million in cash. Purchase-price allocations remained provisional.
- Equinix adopted ASC 606 on January 1, 2018; comparative 2017 figures were not restated. Adoption increased opening retained earnings by $269.8 million. For Q2, the company disclosed that without ASC 606 revenue would have been $1,259.4 million and net income $61.9 million, compared with reported revenue of $1,261.9 million and net income of $67.6 million.
- Foreign currency translation contributed to a first-half comprehensive income of $39.8 million despite net income of $130.5 million. The company recorded a $40.7 million first-half loss on debt extinguishment, principally related to Infomart Dallas and the SK2 property purchase.
Outlook, commentary and risks
- No specific numerical revenue or earnings guidance is provided in this filing. Management expects continued expansion and acquisition activity, rising capital spending, and higher operating costs and interest expense as the business grows.
- Utilization was approximately 82% at June 30, excluding recently acquired data centers and certain other exclusions; management cited power and cooling capacity as potential constraints on usable capacity and growth.
- Management stated it believes cash, operating cash generation and available credit are sufficient for operating needs, current announced expansion projects, debt service and regular dividends. It cautioned that further expansion or acquisitions may require additional financing and that financing may be unavailable or costly.
- Contractual commitments included approximately $763 million of unaccrued capital expenditures and $776 million of other purchase commitments. Minimum operating lease commitments were approximately $2.0 billion; these exclude potential renewals. A further $196.6 million of future lease commitments was not included in the contractual-obligations table.
- Key risks include substantial debt and fixed lease obligations; acquisition integration and provisional asset valuations; electricity cost, availability and power-density limitations; foreign-exchange volatility; customer collection and demand; cybersecurity, service interruption and regulatory exposure; and maintaining REIT qualification. A 10% currency movement was estimated to change the U.S.-dollar amount needed to settle foreign-currency debt principal by approximately $456.5 million.
- CEO Steve Smith resigned in January 2018; Executive Chairman Peter Van Camp was serving as interim CEO. Management considered disclosure controls effective at quarter-end and reported no material internal-control changes during the quarter.
- The filing reports no legal proceedings. The company noted that a significant foreign deferred-tax valuation allowance release could be possible within 12 months, depending on sustained profitability; timing and amount were uncertain.
Important facts for investors to verify
- Separate organic growth, acquisition contributions and foreign-exchange effects when assessing revenue and EBITDA growth.
- Assess margins, capital returns and cash generation against the scale of expansion spending and recurring capital requirements.
- Review debt maturities, interest costs, lease obligations and the company’s capacity to fund dividends and planned investment.
- Track integration and final purchase-price allocations for Metronode and Infomart Dallas, and the performance of acquired facilities.
- Evaluate power availability, utilization, customer demand, foreign-exchange exposure, REIT compliance and progress on the permanent CEO appointment.