Equinix, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. Equinix operates colocation data centers and provides interconnection and managed infrastructure services across the Americas, EMEA and Asia-Pacific. Results include the Verizon data-center business from May 1, 2017, IO UK from February 3, 2017, and the Paris facility from August 1, 2016.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1,152.3 million | $924.7 million | $3,168.2 million | $2,669.3 million |
| Income from continuing operations (operating income) | $224.9 million | $169.9 million | $577.0 million | $434.3 million |
| Net income | $79.9 million | $51.5 million | $167.8 million | $65.1 million |
| Diluted EPS | $1.02 | $0.72 | $2.18 | $0.92 |
| Adjusted EBITDA | $550.3 million | $420.0 million | $1,487.2 million | $1,221.0 million |
| Operating cash flow | Not separately provided for quarter | Not separately provided for quarter | $944.4 million | $718.7 million |
- Q3 revenue increased 25% reported and 24% at constant currency; recurring revenue was 94% of total. Nine-month revenue increased 19% reported and 20% at constant currency.
- Q3 adjusted EBITDA margin was approximately 47.8%, compared with 45.4% a year earlier. Cost of revenues was 51% of revenue in both quarters. The filing reports nine-month cost of revenues at 50% of revenue versus 51%.
- Q3 interest expense was $121.8 million, up from $92.2 million. Nine-month interest expense was $352.6 million, up from $293.4 million. Debt-extinguishment losses were $22.2 million for Q3 and $42.1 million for the first nine months.
- Cash, cash equivalents and investments totaled approximately $1.64 billion at September 30, 2017. Gross debt and financing obligations totaled approximately $10.12 billion; the company reported approximately $1.4 billion of additional availability under its revolving credit facility.
- Nine-month investing cash outflow was $4.62 billion, including $3.63 billion for acquisitions and $946.0 million of capital expenditures. Financing cash inflow was $4.51 billion, principally from debt and equity offerings; dividends paid were $463.9 million.
Material changes and significant items
- The May 2017 Verizon acquisition added 29 data-center buildings for approximately $3.6 billion. It contributed $137.0 million of Q3 revenue and $29.2 million of Q3 continuing-operations net income; its purchase-price allocation remained provisional at quarter-end.
- In March, Equinix issued $1.25 billion of 5.375% senior notes due 2027 and sold shares for net proceeds of $2.13 billion. In January, it borrowed a €1.0 billion term loan. In September, it issued €1.0 billion of 2.875% notes due 2025 and redeemed $500 million of 4.875% notes due 2020, recording a $14.6 million redemption loss.
- Net income comparisons also reflect prior-year discontinued operations: 2016 included $2.7 million for Q3 and $14.3 million for nine months; 2017 had none. Prior-year operating results included asset-sale gains and impairment charges that did not recur in 2017.
- The effective tax rate declined to 2.7% for Q3 and 12.9% for nine months, primarily because previously unrecognized tax benefits were realized after a statute of limitations expired.
Outlook, risks and contingencies
- The filing provides no specific numeric revenue, earnings or cash-flow guidance. Management expects operating costs, sales and marketing spending, general and administrative costs, and interest expense to rise as the business expands and integrates acquisitions.
- Management cited customer demand and data-center expansion as growth drivers, but noted utilization was approximately 78% excluding Verizon; excluding recent expansions and acquisitions, it would have been approximately 83%. Physical capacity may not translate into usable capacity where power is constrained.
- Key risks include Verizon integration and transition-service dependence; substantial debt and lease commitments; foreign-exchange movements; power availability and electricity costs; execution of expansion projects; and maintaining REIT qualification and required distributions. Management said it believed available cash, operating cash flow and credit capacity were sufficient for current operating needs, dividends and announced expansion projects.
- At quarter-end, contractual commitments included $336.8 million of unaccrued capital expenditures and $592.4 million of other purchase commitments. Minimum operating lease commitments were approximately $1.88 billion, excluding potential renewals. Accrued liabilities for uncertain tax positions were approximately $50.9 million.
- Equinix declared a $2.00-per-share quarterly dividend payable in December 2017. It also reported October acquisitions of Itconic for approximately $252.6 million and a Zenium data-center business for approximately $93 million; their purchase accounting was not finalized in the filing.
- Adoption of the new lease standard was expected to significantly increase reported assets and liabilities. Adoption of the new revenue standard was expected to change the timing of installation-revenue recognition and require capitalization and amortization of certain contract-acquisition costs.
- Management concluded disclosure controls were effective. It was evaluating internal-control changes for the acquired Verizon business; no other material quarterly changes to internal control were reported. The filing reports no legal proceedings.
Investor verification priorities
- Assess how much reported growth and profitability came from Verizon and other acquisitions versus organic growth, and whether provisional acquisition valuations or integration costs may change.
- Reconcile operating cash generation with acquisition spending, expansion capital needs, dividends and debt service; review debt maturities, variable-rate exposure and available revolver capacity.
- Track utilization, power constraints and the pace at which new or acquired capacity becomes revenue-producing.
- Review REIT qualification, distribution requirements, uncertain tax exposures and the potential balance-sheet effects of lease-accounting adoption.
- Evaluate foreign-exchange exposure and whether hedging adequately mitigates its effects on revenue, earnings and debt obligations.