Equinix, Inc. — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Equinix operates a global, network-neutral data-center platform, providing colocation, interconnection and managed infrastructure services. At year-end it operated 92 data centers in 35 markets across North America, Europe and Asia-Pacific, serving 3,916 customers. More than 90% of revenue was recurring. The April 2010 acquisition of Switch and Data added 34 data centers in the U.S. and Canada and materially expanded the business.
Key financial metrics
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Revenue | $1,220.3 million | $882.5 million |
| Gross profit / margin | $545.7 million / 44.7% | $399.1 million / 45.2% |
| Operating income / margin | $194.7 million / 16.0% | $181.1 million / 20.5% |
| Net income / diluted EPS | $36.9 million / $0.82 | $69.4 million / $1.75 |
| Adjusted EBITDA (non-GAAP) | $544.8 million | $408.6 million |
| Cash from operating activities | $392.9 million | $355.5 million |
| Cash used in investing activities | $601.0 million | $558.2 million |
| Cash from financing activities | $309.7 million | $323.6 million |
| Cash, cash equivalents and investments at year-end | $592.8 million | $604.4 million |
FY 2010 capital expenditures for property and equipment were $579.4 million, compared with $369.5 million in 2009. Year-end current assets were $778.0 million and current liabilities $318.1 million. Total debt and financing obligations were approximately $2.02 billion on the balance sheet; stockholders’ equity was $1.88 billion.
Fourth quarter: Revenue was $345.2 million, gross profit $151.7 million and net income $13.8 million, or diluted EPS of $0.29. In Q4 2009, revenue was $242.6 million, gross profit $115.5 million and net income $17.7 million, or diluted EPS of $0.44.
Changes versus prior comparable period
- Annual revenue grew 38% year over year. North America revenue increased 45% as reported, including $153.0 million from Switch and Data; excluding that acquisition, North America revenue grew 16%. Europe revenue rose 24% and Asia-Pacific 37% as reported.
- Net income declined 47%, despite higher revenue and operating income. Higher interest expense, acquisition and restructuring costs, and a $10.2 million loss on debt extinguishment and interest-rate swaps weighed on earnings. FY 2009 also included a larger tax expense, while FY 2008 benefited from substantial tax benefits.
- Interest expense increased to $140.5 million from $74.2 million, primarily reflecting new debt, including the $750 million 8.125% senior notes issued in February 2010.
- Operating cash flow increased 11%, while capital investment rose sharply. The company reported 74% utilization including Switch and Data; excluding that acquisition, utilization was 76%, or approximately 84% excluding expansions opened in the prior 12 months.
- Customer count increased 50% to 3,916, reflecting both the acquisition and organic growth. The acquisition was funded with cash and stock; 5.46 million Equinix shares were issued.
Outlook, risks and unusual items
- Management expected revenue growth from recently opened and planned expansions, and forecast eight new data centers or expansions in eight markets during 2011. It expected 2011 expansion construction spending to be similar to 2010 levels; additional opportunities could increase spending.
- Management expected to continue generating operating cash flow, but identified future expansion and acquisition needs as potential reasons to seek additional debt or equity financing. It anticipated higher interest expense from the senior notes and stated that additional Switch and Data restructuring charges were expected in 2011.
- Expansion requires significant spending ahead of customer commitments. Power availability and rising electricity costs may constrain sellable capacity and margins; management noted California climate rules could increase electricity costs at its California facilities by more than 5%, although the amount was uncertain.
- Debt, refinancing and interest costs are material risks. A $250 million 2.50% convertible note issue matures in 2012. The $750 million senior notes mature in 2018; the Asia-Pacific facility is variable-rate and secured by subsidiary assets. The company reported compliance with applicable financial covenants at year-end.
- Other key risks include service outages or security breaches, customer churn or payment difficulties, foreign-exchange movements, competition and lease renewals. The company reported more than 99.9999% uptime across its footprint in 2010, but noted that outages, power shortages and natural disasters could still cause losses and customer claims.
- The Pihana litigation appeal remained pending; the IPO settlement faced appeals. The company said it could not estimate a range of potential loss and had accrued no amount for these legal matters. The Palo Alto lease lawsuit was dismissed with prejudice after a settlement that included higher rent and an Equinix lease guaranty.
- After year-end, Equinix and Riverwood agreed to pursue acquisition of approximately 90% of Brazil-based ALOG for about $127 million, subject to closing conditions.
- FY 2010 included a $3.6 million recovery of prior investment impairment losses. Adjusted EBITDA is a non-GAAP measure that excludes, among other items, depreciation, stock compensation, restructuring and acquisition costs; it should not be treated as a substitute for GAAP earnings or cash flow.
Important facts for investors to verify
- How much of reported revenue growth was organic versus acquired, and whether acquired operations and recent expansions achieve expected utilization and returns.
- Cash generation relative to planned capital expenditures, contractual commitments and operating-lease obligations; the filing lists $199.4 million of committed capital spending and a further estimated $200–250 million of non-contractual expansion spending.
- Debt repayment and refinancing capacity, particularly the 2012 convertible maturity, interest expense and variable-rate exposure.
- Whether power availability, electricity costs and facility reliability limit capacity or pressure margins, and whether the reported utilization figures are comparable across periods.
- Progress and potential financial exposure from litigation, tax matters and the proposed ALOG transaction. The filing does not provide a clear estimate of potential loss for the pending legal matters.