Equinix, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited results; amounts below are in U.S. dollars. Equinix operates data centers and provides colocation, interconnection and related services across the Americas, EMEA and Asia-Pacific.
Financial results and liquidity
- Revenue: Q2 revenue was $525.7 million, up 15% year over year (16% on a constant-currency basis). Six-month revenue was $1.045 billion, up 16% (17% constant currency). Recurring revenue was 96% of Q2 revenue and 95% for the first half.
- Profit and margins: Q2 operating income was $112.2 million, versus $102.1 million a year earlier; operating margin was approximately 21.3%, versus 22.3%. Equinix recorded a Q2 net loss attributable to the company of $28.7 million, or $0.58 per share, compared with net income of $36.4 million, or $0.76 per share, in Q2 2012. The loss largely reflects a $93.6 million debt-extinguishment charge. First-half net income attributable to Equinix was $7.2 million, or $0.15 per share, versus $71.0 million, or $1.49 per share.
- Adjusted EBITDA: Q2 adjusted EBITDA was $244.2 million, up 12%; first-half adjusted EBITDA was $487.6 million, up 14%. Q2 adjusted EBITDA margin was approximately 46.4%, versus 47.6% a year earlier. This is a company-defined non-GAAP measure.
- Cash flow and investment: First-half operating cash flow was $231.3 million, down from $320.8 million. Capital expenditures were $201.5 million, versus $342.0 million in the prior-year period. Cash and cash equivalents were $517.5 million at June 30; cash, cash equivalents and short- and long-term investments totaled $1.217 billion.
- Debt and liquidity: Total indebtedness, including convertible debt and capital lease and other financing obligations, was approximately $3.9 billion. Senior notes totaled $2.25 billion; loans payable were $205.3 million; convertible debt principal was $769.7 million; and capital lease and other financing obligations were approximately $770.1 million. Equinix reported $521.5 million of additional availability under its U.S. credit facility. Current assets were $1.098 billion and current liabilities $607.5 million.
Changes versus the prior comparable period
- Revenue growth reflected customer demand, new and expanded data-center capacity, and acquisitions. Asia-Pacific revenue grew 32% in Q2, EMEA 22%, and the Americas 8%; acquisition contributions included Asia Tone in Asia-Pacific and ancotel and the Dubai data center in EMEA.
- Cost of revenue rose 19% in Q2, faster than revenue, and increased from 49% to 51% of revenue. Management cited expansion-related depreciation, acquisitions, higher compensation and utilities. Customer count, excluding specified acquisitions, increased 9% year over year to approximately 6,354.
- In March, Equinix issued $1.5 billion of senior notes at 4.875% due 2020 and 5.375% due 2023. In April, it redeemed $750 million of 8.125% notes, paying $836.5 million including the redemption premium. Interest expense increased to $61.0 million in Q2 from $46.8 million.
- First-half operating cash flow declined mainly because of working-capital movements and increased tax payments. Management noted some large customer receivables expected in June were collected in July.
Outlook, commentary and risks
- Management expects revenue growth from recently opened and planned data-center expansions, while noting that results depend on bookings, churn, contract changes and capacity availability. Expansion projects were expected to open in various markets during the remainder of 2013 and 2014.
- The company expects 2013 cash taxes of $150–$180 million. Its plan to elect REIT status beginning January 1, 2015 remains subject to conditions, including a favorable IRS private letter ruling; the IRS had convened a working group reviewing the meaning of “real estate” for REIT purposes. Management estimated $50–$80 million of conversion costs and $340–$420 million of tax liabilities from depreciation and amortization recapture, payable over four years beginning in 2012 even if the conversion is abandoned. A proposed accumulated earnings and profits distribution was estimated at $700 million–$1.1 billion, expected to be mostly stock and no more than 20% cash.
- Management expected higher interest expense from the new notes, partly offset by redemption of the 8.125% notes, and cited approximately $17.7 million in incremental annual interest expense. It also stated an intention to become adjusted-free-cash-flow positive in 2013, excluding REIT-related cash costs and tax liabilities; this is not a guaranteed outcome.
- Key risks include REIT qualification and execution, substantial debt and lease commitments, the ability to fund expansion and distributions, foreign-exchange movements, power availability and costs, data-center reliability, customer demand, competition and economic conditions. Utilization excluding specified acquisitions was approximately 77%, versus 80% a year earlier; excluding expansions opened in the prior 12 months, management estimated approximately 80%.
- Unusual accounting item: Equinix extended the estimated recognition period for non-recurring installation fees prospectively from April 1, 2013. The change reduced Q2 and first-half revenue and operating income by $5.8 million, net income by $4.9 million, and EPS by $0.10. A $4.8 million restructuring-charge reversal was recorded after the company decided to purchase and use space at its New York 2 data center. The acquisition closed in July for approximately $73.4 million.
Important facts for investors to verify
- Whether recurring revenue growth and expansion capacity translate into improved margins and operating cash flow as new sites ramp.
- The timing and terms of the IRS ruling, the feasibility of the 2015 REIT election, and the final amounts, timing and cash-versus-stock mix of REIT-related distributions and tax costs.
- Debt maturities, refinancing needs, credit-facility availability and the effect of financing and lease obligations on expansion funding and liquidity.
- Customer collections, utilization and power capacity, particularly in markets where power rather than physical space constrains growth.
- The effects of foreign currency movements and the prospective installation-fee revenue-recognition change on reported growth and comparisons.