Business context and reporting period
Equinix, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. The company operates carrier-neutral colocation data centers and provides interconnection and managed infrastructure services across the Americas, EMEA, and Asia-Pacific. Its recurring-revenue model serves more than 4,500 customers in 32 markets; recurring revenue was 95% of total revenue in 2013.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial totals are in millions except per-share data. Prior-year comparatives are as revised in the filing.
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Revenue | $2,152.8 | $1,887.4 | +14% |
| Gross profit | $1,088.4 | $942.8 | +15% |
| Gross margin | 50.6% | 50.0% | +0.6 percentage points |
| Operating income | $460.9 | $392.9 | +17% |
| Net income attributable to Equinix | $94.7 | $140.0 | -32% |
| Diluted EPS | $1.89 | $2.83 | -33% |
| Adjusted EBITDA (non-GAAP) | $1,000.9 | $887.9 | +13% |
| Cash from operating activities | $604.6 | $632.0 | -4% |
- Revenue growth reflected organic customer demand and data-center expansions, as well as acquisitions. EMEA revenue increased 21% and Asia-Pacific 20%; Americas revenue rose 10%.
- Net income fell despite higher operating income, principally because 2013 included a $108.5 million loss on debt extinguishment, including a $93.6 million charge to redeem 8.125% senior notes. FY 2012 also included $13.1 million of income from discontinued operations, including a sale gain.
- Capital expenditures were $696.8 million. Cash used in investing activities was $1,169.3 million, heavily affected by investment purchases and maturities; financing activities provided $574.9 million.
- At year-end, cash, cash equivalents and investments totaled $1,030.1 million; current assets were $888.7 million and current liabilities $546.5 million. The company reported $516.8 million available under its revolving credit line.
- Total indebtedness was approximately $4.2 billion, including capital lease and other financing obligations. Stockholders’ equity was $2,459.1 million. Minimum operating lease commitments were $954.2 million, excluding potential renewals.
Fourth-quarter information
In Q4 2013, revenue was $564.7 million versus $506.1 million in Q4 2012, and gross profit was $294.9 million versus $256.7 million. Net income attributable to Equinix was $45.2 million versus $45.3 million; diluted EPS was $0.88 versus $0.89.
Material changes and unusual items
- In March 2013, Equinix issued $1.5 billion of senior notes: $500 million at 4.875% due 2020 and $1.0 billion at 5.375% due 2023. Proceeds partly funded the redemption of $750 million of 8.125% notes.
- The company acquired the Frankfurt Kleyer 90 carrier hotel for approximately $50.1 million and purchased its New York 2 data-center property for $73.4 million. It also expanded capacity in several existing markets and entered Osaka, Japan.
- The board authorized a $500 million share-repurchase program through December 31, 2014. Equinix repurchased 288,739 shares for $48.8 million in 2013; it had not historically paid cash dividends.
- Comparative financial statements were revised for accounting errors, including the period used to recognize deferred installation revenue. The filing says the cumulative correction was $27.2 million as of December 31, 2012 and was material to the projected 2013 statements; previously issued statements were revised. The correction did not change reported operating cash flow for 2012.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of December 31, 2013. The auditor issued an unqualified opinion on the financial statements.
Outlook, commentary, and risks
- Management expected continued revenue and Adjusted EBITDA growth from customer demand, utilization, acquisitions, and expansions. Utilization was approximately 76% at year-end, or 82% excluding expansion capacity opened in the prior 12 months. Planned 2014 expansion activity was expected to be similar to 2013; management forecast $230–$270 million of additional, non-contractual expansion capital spending beyond $155.1 million of committed capital expenditures.
- Equinix planned to elect REIT status effective January 1, 2015, subject to a favorable IRS private letter ruling, board approval, and other implementation steps. Management expected a ruling during 2014, but there was no assurance of approval or timely conversion.
- Estimated REIT implementation costs were $75–$85 million. Depreciation and amortization recapture was expected to create $360–$380 million of federal and state tax liabilities, generally payable over four years beginning in 2012, whether or not conversion proceeds. The company expected $145–$200 million of cash taxes in 2014 and a significant 2014 tax provision from deferred-tax remeasurement if conversion actions were completed.
- A special accumulated earnings-and-profits distribution of approximately $700 million–$1.1 billion was anticipated, potentially with up to 20% in cash and at least 80% in common stock; the estimate and timing could change. Regular distributions were intended after conversion. Management estimated annual REIT compliance costs of $5–$10 million if successful.
- Key risks include substantial debt and restrictive covenants, the ability to fund expansion and REIT-related payments, power availability and electricity costs, foreign-exchange movements, customer demand and churn, facility outages or security breaches, and execution of major back-office system upgrades. The company also warned that REIT qualification, tax benefits, and distributions were uncertain.
- Management noted that 2013 operating cash flow was reduced by higher tax and interest payments and customer receipts that shifted into January 2014. It expected cash generation to continue, while anticipating increased tax payments before any REIT conversion.
Important facts for investors to verify
- Review the revised 2012 and 2011 financial statements and the installation-revenue recognition correction; compare GAAP results with management’s non-GAAP Adjusted EBITDA.
- Track the IRS ruling, board and other conversion conditions, actual 2014 tax payments, deferred-tax remeasurement, and the final amount, mix, and timing of any E&P distribution.
- Reconcile reported debt, near-term maturities, lease and financing obligations, revolving-credit availability, and funding needs for expansion and REIT-related cash uses.
- Assess organic growth, utilization and power-constrained capacity separately from acquisition contributions and newly opened data-center capacity.
- Check subsequent filings for actual capital spending, share repurchases, customer trends, and material developments in system upgrades or operational risks.