Equinix, Inc. — Q1 2013 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Equinix operates data centers and provides colocation, interconnection and managed infrastructure services across the Americas, EMEA and Asia-Pacific. The company reported approximately 6,228 customers, excluding specified acquisitions, up 10% year over year. Reported utilization was approximately 75%, versus 81%; excluding data centers opened or expanded during the prior 12 months, management estimated utilization at 83%.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Revenue | $519.5 million | $443.2 million | Up 17% reported; 18% constant currency |
| Recurring revenue | $495.3 million | $420.9 million | Up 18%; 95% of total revenue in both periods |
| Income from continuing operations | $108.6 million | $100.7 million | Up 8% |
| Net income attributable to Equinix | $35.9 million | $34.5 million | Up approximately 4% |
| Basic / diluted EPS | $0.73 / $0.71 | $0.74 / $0.71 | Basic EPS down; diluted EPS unchanged |
| Adjusted EBITDA (non-GAAP) | $243.5 million | $210.6 million | Up 16%; approximately 46.9% of revenue versus 47.5% |
| Operating cash flow | $84.2 million | $126.0 million | Down $41.8 million |
| Capital expenditures | $75.7 million | $145.5 million | Down $69.8 million |
Cost of revenues was $259.3 million, or 50% of revenue, compared with $217.1 million, or 49%. Sales and marketing expense rose to $58.3 million from $46.4 million; general and administrative expense rose to $89.7 million from $78.3 million. Interest expense increased to $60.3 million from $52.8 million. The effective tax rate was 25.1%, compared with 28.6%. Q1 2012 included $0.2 million of income from discontinued operations; Q1 2013 did not.
Liquidity and debt at March 31, 2013: Cash and cash equivalents were $685.0 million; short- and long-term investments were $527.0 million, for $1.212 billion combined, excluding restricted cash. Current restricted cash was $843.5 million, including $836.4 million set aside for the subsequent redemption of senior notes. Total assets were $7.613 billion and stockholders’ equity was $2.342 billion. The filing describes total indebtedness and financing obligations of approximately $4.5 billion. The balance sheet included $3.0 billion principal of senior notes, $769.7 million principal of convertible notes, $226.9 million of loans payable and $584.4 million of capital lease and other financing obligations.
Material changes versus the prior comparable period
- Revenue growth was broad-based: Americas revenue increased 11%, EMEA 19%, and Asia-Pacific 44%. Asia-Pacific growth included $12.9 million from the Asia Tone acquisition; EMEA growth included $6.4 million from the Dubai data center and ancotel acquisitions.
- Recurring revenue rose 18%; colocation revenue increased to $395.1 million from $335.0 million, and interconnection revenue to $76.0 million from $62.9 million.
- Income attributable to Equinix grew more slowly than revenue, while basic EPS edged down. The filing attributes higher costs to expansion, acquisitions, compensation and increased depreciation; interest expense also increased.
- Operating cash flow declined amid working-capital outflows, including higher receivables and payments of accrued expenses, and a $19.0 million excess tax benefit from stock-based compensation. Management said some large March customer collections were received in April.
- In March, Equinix issued $1.5 billion of senior notes: $500 million of 4.875% notes due 2020 and $1.0 billion of 5.375% notes due 2023. In April, it redeemed all $750 million principal of its 8.125% notes, using $830.9 million in cash. The company expects to record an approximately $89.9 million extinguishment loss in Q2 2013.
- Foreign currency translation generated a $72.6 million loss in other comprehensive income, versus a $34.3 million gain in Q1 2012. Management said the stronger U.S. dollar also reduced reported international revenue.
Outlook, management commentary and risks
- Management expected continued revenue growth from recently opened centers and expansions underway, including projects expected to open during the remainder of 2013 and in 2014. It also expected adjusted EBITDA to improve as the business grows. The filing provides no specific consolidated revenue or EPS guidance.
- Management expected 2013 expansion construction activity to be similar to 2012, while noting it could increase spending or pursue acquisitions and joint ventures if opportunities and funding permit. It estimated an additional $220–$250 million of non-contractual expansion capital spending, in addition to $118.8 million of contracted, unaccrued capital expenditures.
- REIT conversion remained a significant plan, with a targeted effective date of January 1, 2015, subject to required steps and favorable IRS rulings. The company estimated $50–$80 million in conversion costs and $340–$420 million of federal and state tax liabilities from depreciation and amortization recapture, payable over four years beginning in 2012 even if the conversion is abandoned. It expected $150–$225 million of cash taxes during 2013 and estimated a $700 million–$1.1 billion earnings-and-profits distribution, primarily in stock. These estimates and timing remain uncertain.
- Management identified data-center power and cooling capacity as constraints on utilization and growth; electricity costs, foreign exchange movements, customer collections and churn, and the ability to finance expansion as material risks. It also cited substantial debt, lease commitments, competition, execution risks on expansions and acquisitions, and uncertainty in global markets.
- A securities class action and two related derivative actions remained pending. The company stated an unfavorable outcome was reasonably possible, but it could not estimate a loss range and had not accrued an amount because it did not consider an unfavorable outcome probable.
- The 4.875% and 5.375% senior notes have covenants restricting specified activities. The filing also notes that REIT qualification, planned distributions and expansion funding may be affected by debt covenants and financing access.
Most important facts for investors to verify
- Whether organic revenue, bookings and utilization support continued growth after separating acquisition contributions and currency effects.
- Whether the April 2013 redemption, its $89.9 million expected Q2 loss and the new notes’ interest costs affect subsequent earnings, cash and leverage as expected.
- Whether operating cash flow recovers and whether planned expansion spending, REIT-related taxes and distributions can be funded without materially increasing debt or diluting shareholders.
- Whether Equinix obtains the necessary IRS ruling and completes the steps for REIT conversion on schedule, and whether its estimated tax, compliance and distribution amounts change.
- Whether power availability, utilization at recently opened facilities, foreign exchange movements, customer payment trends and pending litigation create material changes to results or liquidity.