Equinix, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2016. Equinix operates data centers and provides colocation, interconnection and managed infrastructure services across the Americas, EMEA and Asia-Pacific. Results include TelecityGroup from January 15, Bit-isle from January 1, and the Paris IBX data center from August 1, 2016; comparisons with 2015 are therefore affected by acquisitions.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $924.7 million | $686.6 million | $2,669.3 million | $1,995.4 million |
| Income from continuing operations | $169.9 million | $140.9 million | $434.3 million | $431.5 million |
| Net income | $51.5 million | $41.1 million | $65.1 million | $177.0 million |
| Diluted EPS | $0.72 | $0.71 | $0.92 | $3.08 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $717.3 million | $659.7 million |
- Q3 revenue increased 35%; recurring revenue was $877.5 million, or 95% of total revenue, versus 94% a year earlier. By service, colocation contributed $680.5 million and interconnection $135.5 million.
- Q3 cost of revenue was $470.3 million, or 50.9% of revenue, compared with 47.4% a year earlier. Operating income rose 21%, slower than revenue growth.
- For the first nine months, revenue rose 34%, while income from continuing operations was nearly flat. Net income fell substantially year over year, reflecting higher interest expense, foreign-exchange losses, acquisition-related costs and other items.
- Management’s non-GAAP adjusted EBITDA was $420.0 million in Q3, up 31%, and $1,221.0 million for nine months, up 30%. AFFO was $284.2 million in Q3 versus $210.4 million and $784.6 million for nine months versus $653.5 million. These measures exclude specified costs and are not GAAP substitutes.
- At September 30, cash and cash equivalents were $987.9 million; cash, cash equivalents and investments totaled approximately $1,003.4 million. Total assets were $13.1 billion and stockholders’ equity was $4.6 billion.
- Total indebtedness, including financing obligations, was approximately $7.0 billion: $3.9 billion of senior notes, $1.5 billion of capital lease and other financing obligations, and $1.6 billion of mortgage and loans payable. Approximately $518.985 million of mortgage and loan balances was classified current. The $1.5 billion revolving facility had no borrowings outstanding; letters of credit reduced availability by $39.7 million.
- Capital expenditures were $727.0 million for nine months. Cash dividends paid were $374.2 million. Cash and cash equivalents declined $1.241 billion from year-end, with acquisitions a major investing cash use.
Material changes versus the prior comparable period
- TelecityGroup, acquired for approximately $3.8 billion in January, expanded the European footprint; Bit-isle added Japan operations, and the Paris acquisition added a facility in August. Acquisitions contributed materially to reported revenue growth, particularly in EMEA and Asia-Pacific.
- Q3 revenue grew across all regions: Americas 11%, EMEA 70% and Asia-Pacific 57%. Management attributed growth to acquisitions, new data center capacity and higher orders from new and existing customers. Currency movements also affected regional results.
- Nine-month operating income remained close to the prior year despite higher revenue. The filing cites acquisition and integration spending, greater depreciation and amortization, and increased operating costs. Nine-month acquisition costs were $64.6 million versus $24.4 million.
- Interest expense increased to $293.4 million for nine months from $219.6 million. Other expense was $56.2 million, including $63.5 million of foreign-currency losses in Q1 related to completing the TelecityGroup acquisition; a $10.5 million debt-extinguishment loss was also recorded.
- Equinix sold the TelecityGroup divestiture assets for approximately $827.3 million in July, recognizing $4.2 million gain in discontinued operations. The LD2 sale generated a $27.9 million gain; the San Jose land sale also contributed to nine-month asset-sale gains. A $7.7 million impairment was recorded on assets held for sale.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects revenue growth from existing customer demand, recently opened facilities and expansions expected during the remainder of 2016 and 2017. It also expects operating costs and interest expense to rise with expansion and acquisition activity; management expects certain expense categories to decline as a percentage of revenue over time, though timing and results are uncertain.
- Management reported approximately 81% utilization at September 30, 2016, unchanged year over year; excluding expansions opened in the prior 12 months, utilization would have been approximately 83%. Capacity may be constrained by power availability even where physical cabinet space remains.
- Expansion commitments include $474.6 million of unaccrued capital expenditures and $344.0 million of other purchase commitments. Management also estimated a further $516.7 million to $616.7 million of non-contractual expansion capital spending. Minimum operating lease commitments were approximately $1.6 billion, excluding renewals.
- Management said existing liquidity and expected operating cash flow should support operations, debt repayment, dividends and announced expansions. It cautioned that weaker customer collections, churn, adverse markets or limited access to financing could impair liquidity and expansion plans.
- Key risks include substantial debt and lease obligations, acquisition integration and realization of synergies, REIT qualification and distribution requirements, currency volatility, power costs and availability, data-center reliability and cybersecurity, and uncertain economic and political conditions including Brexit. A 10% currency-rate move, before hedging, was estimated to change nine-month revenue by about $150 million and pretax continuing income by approximately $19–22 million, depending on direction.
- Equinix operates as a REIT for U.S. federal tax purposes and declared a $1.75-per-share quarterly dividend for payment in December 2016. The company noted that REIT status and future distributions are not assured. Disclosure controls were assessed as effective; integration-related internal-control work for TelecityGroup was ongoing.
Important facts for investors to verify
- How much of reported revenue and adjusted EBITDA growth reflects acquired businesses versus organic growth, and whether acquisition integration and synergies progress as expected.
- Whether recurring revenue, operating cash flow and AFFO support dividends and the planned expansion program after recurring capital expenditures, debt service and lease commitments.
- The company’s leverage, upcoming debt maturities and refinancing needs, including the October 2016 borrowing and repayment of the Bit-isle bridge loan.
- Whether data-center utilization, power availability and customer demand support returns on committed and planned capital spending.
- Whether Equinix maintains REIT qualification and can meet distribution requirements without materially increasing debt or issuing dilutive equity.
- How foreign-exchange movements, acquisition accounting estimates and held-for-sale asset valuations affect reported results; purchase-price allocations for the Paris and TelecityGroup acquisitions remained provisional.