Equinix, Inc. — Q1 2017 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2017, compared with Q1 2016. Equinix operates global colocation data centers and interconnection services across the Americas, EMEA, and Asia-Pacific. Recurring services generated 95% of quarterly revenue. Results include the Paris data center acquisition and, from February 3, the IO UK data center business; the prior-year period included TelecityGroup from January 16.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $949.5 million | $844.2 million | +12% reported; +14% constant currency |
| Income from operations | $167.2 million | $112.7 million | +48% |
| Net income (loss) | $42.1 million | $(31.1) million | Returned to profit |
| Diluted EPS | $0.57 | $(0.46) | Improved |
| Operating cash flow | $247.4 million | $104.8 million | Increased |
| Adjusted EBITDA | $427.6 million | $380.7 million | +12% |
| AFFO | $304.1 million | $209.8 million | +45% |
Margins and revenue mix. Cost of revenues was $469.0 million, or 49% of revenue, versus $427.7 million, or 51%, a year earlier; the resulting gross margin was approximately 51% versus 49%. Operating margin was approximately 17.6% versus 13.3%. Recurring revenue rose to $898.4 million from $796.6 million. All regions grew revenue: Americas +8%, EMEA +18%, and Asia-Pacific +15% reported. Management attributed growth to customer demand, new capacity and acquisitions; currency movements particularly affected EMEA reported results.
Cash, investment and spending. Cash and cash equivalents were $4.92 billion at March 31, up from $748.5 million at year-end, mainly reflecting equity and debt financing. Investing activities used $314.4 million, including $277.2 million of PP&E purchases, $41.7 million of real estate purchases, and $36.0 million for acquisitions, partly offset by $47.8 million of asset-sale proceeds. Operating cash flow less PP&E and real estate purchases was approximately negative $71.6 million. Dividends paid were $148.1 million.
Debt and liquidity. Gross debt and financing obligations totaled approximately $9.27 billion at quarter-end, including $5.10 billion principal on senior notes, $2.55 billion principal on mortgages and loans, and $1.62 billion present value of capital lease and other financing obligations. The company raised $2.13 billion net from a March share offering and issued $1.25 billion of 5.375% senior notes due 2027; it also borrowed €1.0 billion under its Term B-2 loan. It reported approximately $1.4 billion of availability under its $1.5 billion revolving facility after letters of credit. Operating leases represented approximately $1.7 billion of minimum commitments, excluding potential renewals.
Material changes, outlook and risks
- Verizon acquisition: After quarter-end, on May 1, 2017, Equinix completed its approximately $3.6 billion purchase of Verizon’s colocation business, comprising 29 data center buildings in the U.S., Brazil and Colombia. The company said financing raised during Q1 funded the transaction; purchase accounting was not finalized in the filing.
- Profit comparison: Q1 2016 included $60.7 million of other expense, primarily foreign-currency losses related to TelecityGroup, and $36.5 million of acquisition costs. Q1 2017 included $3.5 million of debt-extinguishment loss and $3.0 million of acquisition costs. The prior period also included $6.2 million of discontinued-operations income.
- Management outlook: No specific full-year revenue or earnings guidance is provided. Management expected continued operating cash generation and revenue growth, while anticipating higher interest expense from increased borrowings, rising operating expenses with expansion, and additional acquisition costs related to Verizon. The Verizon deal expanded the stated footprint to 179 data centers across 44 markets.
- Capacity and investment: Utilization was approximately 79%, versus 80% a year earlier; management said utilization excluding recently opened expansion projects and acquisitions would have been about 84%. Power availability may constrain usable capacity even where physical cabinet space remains. The filing cites $415.4 million of unaccrued capital commitments and estimates a further $745.2 million to $845.2 million of non-contractual expansion capital spending.
- Key risks and contingencies: Risks include successful Verizon integration and realization of expected benefits, substantial debt and fixed lease commitments, access to future financing, power and electricity costs or availability, foreign-exchange volatility, customer demand and collections, and maintaining REIT qualification and required distributions. Potential indirect and property tax assessments could materially affect results; the company reported $56.6 million of accrued uncertain tax positions. Management stated disclosure controls were effective at quarter-end.
- Accounting changes: Equinix expected to adopt the new revenue standard in 2018 using the modified retrospective method; it anticipated installation revenue would be recognized over contract terms and certain contract-acquisition costs capitalized. It also expected the new lease standard to have a significant financial-statement impact because of its substantial leases.
Important facts for investors to verify
- How Verizon assets, liabilities, integration costs, and operating results are reflected after the May 1 closing, and whether expected benefits materialize.
- Debt service, variable-rate exposure, covenant capacity, and liquidity after funding the acquisition and continuing expansion.
- Whether customer demand, utilization, and power capacity support returns on planned capital spending.
- How much of revenue and earnings growth reflects organic demand versus acquisitions, foreign exchange, and prior-year comparison items.
- REIT compliance, dividend coverage and sustainability, and the eventual impact of revenue and lease accounting standards.