Equinix, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Dollar amounts below are in millions unless otherwise noted. Equinix operates data centers and provides colocation, interconnection, and managed infrastructure services. Results include ALOG, acquired in April 2011, so year-over-year comparisons include an acquisition contribution.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $452.2 | $363.0 | +24.6% |
| Operating income | $101.1 | $71.3 | +41.8% |
| Net income attributable to Equinix | $34.5 | $25.1 | +37.3% |
| Basic / diluted EPS | $0.74 / $0.71 | $0.54 / $0.53 | Higher |
| Operating cash flow | $126.0 | $117.8 | +7.0% |
| Capital expenditures | $145.5 | $190.1 | Lower |
| Adjusted EBITDA (non-GAAP) | $215.2 | $167.3 | +28.6% |
- Gross margin was approximately 50%, up from 46%; operating margin was approximately 22.4%, up from 19.6%. Net margin attributable to Equinix was approximately 7.6%, versus 6.9%.
- Revenue was 95% recurring. Colocation revenue was $340.8 million, interconnection $65.8 million, and managed infrastructure $22.3 million.
- Regional revenue: Americas $288.1 million (+24%), EMEA $101.3 million (+24% reported; +27% constant currency), and Asia-Pacific $62.8 million (+30% reported; +27% constant currency). Management attributed growth to customer demand, expansions, and ALOG; currency hurt EMEA and helped Asia-Pacific.
- Customer count, excluding ALOG, rose 19% to 4,828. Utilization excluding ALOG increased to 82% from approximately 79%; excluding recent expansions, management estimated 85%.
Balance sheet, liquidity and cash flow
- At March 31, cash and cash equivalents were $632.9 million; short- and long-term investments totaled $450.3 million. Combined cash and investments were $1.083 billion, versus $1.076 billion at year-end 2011.
- Total assets were $5.884 billion and total liabilities $3.755 billion. Current assets were $1.174 billion and current liabilities $718.1 million.
- Debt and financing obligations included $1.020 billion principal of convertible notes, $1.5 billion of senior notes, $219.9 million of loans payable, and $414.9 million of capital lease and other financing obligations. The filing describes total indebtedness as approximately $3.1 billion.
- Operating cash flow was $126.0 million; capital expenditures were $145.5 million, implying approximate operating cash flow less capex of negative $19.5 million. The reported $269.4 million of investing cash inflow primarily reflected investment maturities and sales and release of restricted cash, not operating generation.
- Equinix reported $128.4 million available under its $150 million revolving credit facility. Management said existing liquidity and operating cash generation should cover operations, current debt repayments, and announced expansion plans.
Changes, outlook and notable items
- Operating income and margins improved despite higher operating expenses. Interest expense rose to $52.8 million from $37.4 million, primarily due to the 7.00% senior notes issued in July 2011 and financing for expansion. The effective tax rate declined to 28.7% from 30.7%.
- In April 2012, virtually all holders converted the $250 million 2.50% notes. Equinix settled principal and accrued interest with $253.1 million cash and 622,867 shares. This reduced future interest expense, but used cash and issued shares.
- Holders of the 4.75% convertible notes became eligible to convert during Q2 2012 under the note terms. Management also stated an intention to become free-cash-flow positive in 2013; this is an objective, not a quantified quarterly forecast in the filing.
- Management expected continued revenue and adjusted EBITDA growth, and stated that 2012 expansion construction activity would be similar to 2011. Planned expansions were expected to open in various markets during 2012 and 2013. No specific consolidated revenue or earnings guidance was provided in the filing text.
- Expansion commitments include $265.9 million of unaccrued capital expenditures and $176.5 million of other purchase commitments. Management estimated an additional $100 million to $150 million of non-contractual expansion capex may be incurred.
- Risk factors include high debt and fixed lease commitments, potential difficulty obtaining financing, customer payment/churn risk amid economic weakness and European debt concerns, foreign-exchange volatility, power availability and rising electricity costs, capacity constraints, execution and demand risks for expansions, and service interruption or security events.
- Legal matters include Pihana litigation, for which a global settlement was agreed in principle but not finalized, and securities class-action and derivative matters. Equinix had not accrued amounts for these matters, citing that an unfavorable outcome was not considered probable; potential loss ranges were not determinable.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of revenue growth and margin improvement reflects organic demand versus ALOG and newly opened or expanded facilities.
- Whether utilization, customer bookings, and power capacity support the planned expansion pipeline and management’s growth expectations.
- Cash needs and refinancing or conversion consequences for remaining convertible debt, including the 4.75% notes’ Q2 conversion eligibility.
- Actual expansion spending versus the $265.9 million committed amount and the additional estimated $100 million to $150 million of non-contractual capex.
- Progress and potential financial exposure from the Pihana settlement and other litigation, as well as customer collections and EMEA credit risk.