Equinix, Inc. — Form 10-Q Summary
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the same periods in 2014. Equinix operates colocation data centers and provides interconnection and related services across the Americas, EMEA, and Asia-Pacific. It began operating as a REIT for U.S. federal tax purposes on January 1, 2015.
Key financial results
Amounts are in millions of U.S. dollars except per-share data. Margins are calculated from reported figures.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $686.6 | $620.4 | $1,995.4 | $1,805.7 |
| Operating income | $140.9 | $135.1 | $431.5 | $381.4 |
| Operating margin | 20.5% | 21.8% | 21.6% | 21.1% |
| Net income attributable to Equinix | $41.1 | $42.8 | $177.0 | $95.6 |
| Diluted EPS | $0.71 | $0.79 | $3.08 | $1.84 |
| Adjusted EBITDA | $321.5 | $283.9 | $938.5 | $819.5 |
| Adjusted EBITDA margin | 46.8% | 45.8% | 47.0% | 45.4% |
| Net cash from operating activities | Not separately stated | $659.7 | $487.1 |
- Q3 revenue increased 11% reported, or 19% on a constant-currency basis. Recurring revenue was 94% of the quarter’s total, versus 95% a year earlier. Colocation and interconnection grew; managed infrastructure and rental revenue declined.
- For the first nine months, revenue increased 11% reported, or 18% constant currency. All three regions grew; Asia-Pacific had the fastest reported regional growth in Q3 at 13%.
- Q3 cost of revenue was $325.5 million, 47% of revenue versus 49% a year earlier. Sales and marketing was $83.7 million and G&A was $123.2 million; both rose in dollars. Q3 net income was slightly lower year over year despite higher operating income, reflecting higher interest expense and other expense.
- Nine-month net income increased from 2014, which included a $51.2 million debt-extinguishment loss. The effective tax rate for the nine-month periods was 12.5% in 2015 and 30.9% in 2014; management attributed the decrease mainly to REIT status.
- Nine-month AFFO was $653.5 million, up from $567.2 million; NAREIT FFO was $497.8 million, up from $394.6 million. These are non-GAAP measures and should be considered alongside GAAP results.
Cash, debt, and liquidity
- At September 30, 2015, cash and cash equivalents were $335.5 million; cash, cash equivalents, and investments totaled $339.5 million. A further $493.4 million was classified as current restricted cash, principally for the TelecityGroup offer, and was not freely available for general use.
- Operating cash flow for the first nine months was $659.7 million. Investing activities used $605.9 million and financing activities used $319.8 million. Capital expenditures reported by segment totaled $636.0 million, including acquisition and real-estate purchases.
- Total indebtedness was approximately $4.7 billion, including about $2.8 billion of senior-note principal, $1.2 billion of capital lease and other financing obligations, $542 million of mortgage and loan principal, and $157.9 million of convertible-note principal. Interest expense was $219.6 million for the nine months, up from $199.5 million.
- The company reported approximately $957.3 million of available capacity on its $1.0 billion revolving credit facility after letters of credit. It also had acquisition bridge facilities: up to approximately $1.34 billion for TelecityGroup and approximately $395.8 million for Bit-isle. Neither facility had been drawn at September 30; an initial Bit-isle draw of about $226.9 million occurred in October.
- Current liabilities were $1.46 billion, including $640.1 million of dividends payable, largely reflecting the declared special distribution. Current assets were $1.24 billion, including restricted cash; these balances should not be read as unrestricted liquidity.
Material changes, outlook, and risks
- Acquisitions: Equinix expected to complete its approximately $280 million Bit-isle acquisition by year-end 2015 after about 97% of shares, including options, were tendered. It expected to close its approximately $3.6 billion TelecityGroup cash-and-share offer in the first half of 2016, subject to regulatory and other approvals. TelecityGroup-related currency hedges generated an $11.6 million mark-to-market loss in Q3; the company had not drawn the related bridge loan at quarter-end.
- Distribution and REIT: The board declared a $627.3 million special distribution, approximately $10.95 per share, payable November 10, 2015. Shareholders could elect cash or stock, with aggregate cash payments capped at $125.4 million. Regular quarterly dividends were $1.69 per share. Management expected 2015 distributions to meet or exceed taxable income, but continued REIT qualification and distribution requirements are material considerations.
- Growth and capacity: Management cited customer demand, new and expanded data centers, and organic growth as revenue drivers. Utilization was approximately 81%, versus 77% a year earlier, or about 84% excluding expansions opened during the prior 12 months. Management identified power and cooling capacity as potential constraints and planned further expansion; no quantified full-year revenue or earnings guidance was provided.
- Currency and costs: A stronger U.S. dollar materially reduced reported international revenue and adjusted EBITDA. Management noted possible future increases in electricity, expansion, acquisition, and financing costs. It expected interest expense to rise as recent debt financing took full effect and as it financed growth and acquisitions.
- Collections and investment: Management said days sales outstanding had risen following billing-system implementation across regions, with further system work still underway. It characterized the issue as temporary but warned that continued billing or collection delays could affect operating cash flow and liquidity. The filing also cites customer churn, expansion returns, financing availability, debt levels, REIT compliance, acquisition integration, data-center reliability, and power availability as risks.
- Commitments and unusual items: The company disclosed $244.7 million of unaccrued capital-expenditure commitments, $395.9 million of other purchase commitments, and estimated additional noncontractual expansion spending of $143.5 million to $243.5 million. A £50 million (about $76.4 million) payment may be due to TelecityGroup if specified regulatory conditions are not met or are invoked. Q3 acquisition costs were $13.4 million, including $8.6 million related to a court ruling in a historical acquisition.
- Management stated that disclosure controls were effective at quarter-end. It reported changes to EMEA billing-related control processes following system implementation, not in response to identified control deficiencies. No legal proceedings were reported in the filing’s legal-proceedings item.
Important facts for investors to verify
- Progress and final financing terms for the TelecityGroup and Bit-isle transactions, including regulatory approvals, closing dates, integration costs, and any share dilution.
- Whether billing-system changes resolve elevated DSO and whether customer collections and operating cash flow remain strong.
- Unrestricted liquidity after the special distribution, expansion spending, dividends, and acquisition funding; distinguish available revolver capacity from restricted cash and acquisition-only facilities.
- Debt maturities, refinancing needs, interest expense, lease commitments, and covenant limits as the company pursues acquisitions and growth.
- Ongoing REIT qualification, required distributions, tax liabilities, and the effect of foreign currency movements on reported results.
- Data-center utilization and power capacity, along with the returns and timing of planned expansions.