Equinix, Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Financial statements are unaudited; amounts below are in U.S. dollars unless noted.
Business context and reporting period
Equinix operates colocation, interconnection and managed infrastructure services through data centers across North America, Europe and Asia-Pacific. It reported 90 data centers in 35 markets. The April 30 acquisition of Switch and Data, which operated 34 U.S. and Canadian data centers, is included in results from May 1, 2010 and materially affects year-over-year comparisons.
Financial results and liquidity
- Q3 revenue: $330.3 million, up 45% from $227.6 million. Recurring revenue was 95% of total revenue. Colocation revenue was $257.3 million and interconnection revenue was $48.8 million.
- Q3 profitability: Operating income was $52.0 million versus $45.6 million; net income was $11.2 million versus $18.8 million. Diluted EPS was $0.24 versus $0.47. Gross margin was approximately 43.9% versus 44.6%; operating margin was 15.7% versus 20.0%.
- Nine-month results: Revenue was $875.1 million, up 37%; operating income was $140.2 million versus $130.3 million; net income was $23.1 million versus $51.7 million. Diluted EPS was $0.52 versus $1.32. Net income fell despite revenue growth, primarily amid higher interest expense and acquisition-related costs.
- Adjusted EBITDA: $146.5 million in Q3 versus $106.0 million; $395.9 million for nine months versus $296.9 million. Adjusted EBITDA is a non-GAAP measure; its margin was approximately 44.3% in Q3 and 45.2% year to date.
- Cash flow and investment: Nine-month operating cash flow was $270.0 million, compared with $273.0 million. Investing cash use was $618.5 million and financing cash provided was $395.7 million. Capital expenditures were $436.0 million. Cash and cash equivalents ended at $389.1 million.
- Liquidity: Cash, cash equivalents and investments totaled $715.4 million. Current assets were $891.8 million and current liabilities $311.0 million. Management reported approximately $101.9 million of additional available liquidity under the Asia-Pacific facility and revolving credit line.
- Debt: Management reported total indebtedness of approximately $2.1 billion, including $750 million of 8.125% senior notes due 2018, approximately $1.0 billion principal of convertible notes, and mortgage, loan and financing obligations. Interest expense was $38.4 million in Q3 versus $22.3 million and $101.7 million for nine months versus $51.6 million.
Material changes versus prior comparable periods
- Switch and Data contributed $57.5 million of Q3 revenue and $95.1 million for the nine-month period. Excluding the acquisition, North America revenue grew 16% in Q3 and 18% year to date.
- Customer count rose to 4,151 from 2,966 a year earlier, primarily because of the acquisition. Utilization was 73% including Switch and Data; excluding the acquisition it was 74%, compared with approximately 81% a year earlier. Excluding recent expansions as well, management estimated utilization at approximately 84%.
- Q3 costs rose with the expanded business and investment: cost of revenue increased 47%, sales and marketing 101%, and general and administrative expense 50%. Year-to-date capital expenditures increased from $267.8 million to $436.0 million.
- The company issued $750 million of senior notes in February and established a new multi-currency Asia-Pacific financing in May. It prepaid several prior debt facilities and terminated related interest-rate swaps; the nine-month statement includes a net $4.8 million loss on debt extinguishment and swaps.
- Shares issued in the Switch and Data acquisition and other equity activity increased weighted-average shares; Q3 diluted weighted-average shares were 46.7 million versus 39.9 million.
Outlook, management commentary, risks and unusual items
- Management expected revenue growth from recently opened centers and expansions, with additional North American openings expected through early 2011, European expansions during the remainder of 2010, and Asia-Pacific expansions through 2011. The filing provides no numerical revenue or earnings guidance.
- Management expected higher interest expense from the new senior notes and Asia-Pacific financing, and low interest income given low yields and a short-term U.S. Treasury-weighted portfolio. It also expected additional Switch and Data restructuring charges through early 2011.
- Expansion plans require substantial capital. The filing lists $61.2 million of committed, unaccrued capital expenditures and estimates a further $350–$400 million of non-contractual expansion spending. Power availability and rising power needs could constrain usable capacity and growth; energy costs, construction delays, customer demand, foreign exchange and access to financing are also risks.
- Key risks include approximately $2.1 billion of debt, refinancing needs, acquisition integration and dilution, customer payment difficulties or churn, competition and pricing pressure, data-center outages and security incidents, and foreign-currency exposure. The company said it was in compliance with the covenants on its Asia-Pacific financing and revolving credit line at quarter-end.
- Legal matters include an appeal in the Pihana litigation and appeals related to the IPO settlement; Equinix said outcomes and potential material effects could not be determined. A new lease-related 529 Bryant lawsuit seeks damages and other remedies; the company was discussing settlement and intended to defend it. The Switch and Data merger litigation was settled and dismissed.
- Unusual items include $6.2 million of nine-month restructuring charges, $12.0 million of acquisition costs, and a $3.6 million recovery of prior investment impairment. A $680,000 reversal of an Asia-Pacific sales incentive accrual was recorded as an out-of-period adjustment and deemed immaterial to prior periods.
Important facts for investors to verify
- How much reported growth reflects Switch and Data versus organic growth, and whether utilization and expansion openings support management’s revenue expectations.
- Whether operating cash flow can fund the planned expansion program, given capital spending, debt service and the additional $350–$400 million of estimated non-contractual spending.
- Debt maturities, refinancing options and covenant headroom, particularly the $250 million convertible notes due 2012 and the limited availability under the revolving credit line.
- The effect of higher interest expense, acquisition integration, restructuring and customer-contract amortization on GAAP earnings and margins.
- Potential exposure from the 529 Bryant and other litigation, power constraints, electricity costs, foreign exchange and data-center reliability risks.